Future Cash Flows Research Articles

Institutional ownership and the informativeness of disclosure tone

AbstractDisclosure tone is an important qualitative characteristic of managerial disclosures. There is mixed evidence on the role of tone in disclosure strategy. While some studies highlight the informativeness of disclosure tone, other studies provide evidence consistent with an information obfuscation role. We conjecture that the mixed evidence may be because prior studies have not explicitly modeled the role of oversight over managerial disclosure. Using an exogenous shock to institutional ownership, an important source of managerial oversight, we find that abnormal disclosure tone is informative of a firm's future earnings and cash flows when institutional ownership is high. This positive association between institutional ownership and informativeness of abnormal tone is stronger when there is an increase in quasi‐indexer institutional ownership and the contemporaneous performance is negative. Collectively, the results highlight a more complex role for disclosure tone. Abnormal disclosure tone could be reflective of managerial sentiment and convey forward‐looking information to investors in the presence of greater oversight over managerial actions.

Accrual accounting basis and cash flow future predictions

Cash flow statement is considered one of the key financial statements that the accounting standards, rules whether international or local have obliged companies to prepare at the end of the end of the period year, in addition to the other financial such as income statement and the statements financial position. The statements of cash flow is regarded as the most significant tool for financial analysis that helps users to make different types of economics decisions with a degree of rationality and reasonability, as well as predicting the future of company. The aim of this paper is to show the relationship between the statement of cash flows based on accrual and future forecasts of cash flow for companies by analyzing figures and ratios of this statement. To achieve the objectives of the paper, the researcher relied on reviewing 14 related studies that were published in different journals and by different authors for time periods (2016 - 2020). This study reached a number of results based on the aforesaid studies, the most important of which is that the accrual-based accounting rules relate to the future cash flow of companies, including accounts receivable, accounts payable, expenses, depreciation, etc. Moreover, based on these results, it is expected that future research will explore other financial factors that influence the company's future cash flow, for example, the company's financial risk.

Valuation of Top Three FMCG Companies in India

Valuation is a quantitative method of determining the fair value of an asset or a company. Discounted cash flow is a valuation technique used to estimate the value of a company based on its future cash flows. The comparable company valuation method is used to evaluate the value of a company using the metrics of other comparable companies of similar size from the same industry. This study employed these two valuation techniques to determine the intrinsic value of the top three fast-moving consumer goods – personal care segment companies, namely Hindustan Unilever Limited, Dabur India Limited, and Godrej Consumer Products Limited. The financial metrics were extracted from the selected companies’ annual reports for 5 years from 2015 – 2019, and the stock price data were gathered from the National Stock Exchange. The explicit forecast was done for 5 years, from 2020 – 2024. This study concluded that these value-creating stocks would undoubtedly be wealth-creating stocks for investors.

ESG Risks and the Value Relevance of Current and Historical Earnings

AbstractWe investigate whether independent, third‐party assessments of firms’ Environmental, Social, and Governance (ESG) risk exposures provide forward‐looking information content to capital market participants by evaluating whether these ESG risks have a moderating effect on the ability of earnings and the book values of equity to predict investors’ expectations of the present value of future cash flows. We find that firms’ higher ESG risk exposure increases the association between current earnings and firm values, while decreasing the relevance of book values of equity (i.e., historical earnings). We find that this effect is strongest for firms with the highest levels of risk exposure and following large changes to ESG risk exposures. In additional analyses, we disaggregate ESG risk exposure and while we find that each component of ESG has predictive power consistent with the main findings, governance risks dominant the results in head to head specifications. Taken together, our findings suggest that governance risk exposures provide forward‐looking information content to investors when they evaluate the ability of current earnings to predict future cash flows. Our results are robust to several measures of ESG risk exposure, entropy balancing specifications, and exogenous shocks to ESG attention following global environmental and social justice initiatives.

Financial Reporting Quality and Private Firms’ Access to Trade Credit Capital

The research problem We examine the association between financial reporting quality and trade credit capital for a large sample of European private firms. Furthermore, we explore how information asymmetry and credit rationing moderate the link between financial reporting quality and trade credit financing. Motivation Trade credit constitutes one of the most important sources of financing for private firms. Nevertheless, prior research has provided few and inconclusive evidence of the link between financial reporting quality and private firms’ trade credit capital. Our study is further motivated by the recent calls for more research on the determinants of the relation between financial reporting quality and trade credit financing (e.g., Hope & Vyas ( 2017 )). The test hypotheses H1: There is a positive association between financial reporting quality and private firms’ access to trade credit capital. H2a: The relation between financial reporting quality and private firms’ access to trade credit capital is more positive when information asymmetry and uncertainty about future cash flows are high. H2b: The relation between financial reporting quality and private firms’ access to trade credit capital is more positive when credit is rationed. Target population Policymakers who seek to improve accounting standards and customize them to the financial reporting needs of private firms and their stakeholders (e.g., international financial reporting standards for small and medium-sized enterprises), private firm managers, and private firm suppliers. Adopted methodology Ordinary Least Squares regression analyses. Analyses We examine the association between financial reporting quality and trade credit financing for a large sample of private firms from Europe’s five largest economies, i.e., France, Germany, Italy, Spain, and the United Kingdom. Our sample period spans from 2010 to 2016. We use the Amadeus database as our source of data. We regress trade credit capital on three proxies for financial reporting quality. In cross-sectional analyses, we repeat our main estimations by interacting our proxies for financial reporting quality with proxies for information asymmetry and credit rationing. Findings We find strong evidence that high-quality financial reporting is associated with more trade credit financing in private firms. We further show that the positive relation between high-quality financial reporting and trade credit is stronger when information asymmetry and uncertainty about future cash flows is high as well as when credit is rationed. These findings suggest that suppliers complement insider communication channels and financial reporting quality and provide a more nuanced understanding of the interplay among information asymmetry, credit rationing, and trade credit financing.

Konservatisme Akuntansi dan Kinerja Perusahaan di Indonesia

This study aims to confirm the relationship between accounting conservatism and the financial performance of companies in Indonesia in the 2019 period. Accounting conservatism is still debated between standard setters and accountants. The accountants argue that accounting conservatism is still needed to reduce the opportunistic behavior of managers. Meanwhile, accounting standard setters stated that accounting conservatism had an impact on biased financial statements. The research sample was selected with several criteria so that 564 companies were obtained. Panel data were analyzed by regression and the results showed that conservative accounting had an effect on Return On Assets (ROA). Accounting conservatism will reduce information asymmetry, which will reduce managers’ opportunistic behavior and increase investment efficiency and improve company performance. However, accounting conservatism has no effect on firm value (Tobin’s Q). Accounting conservatism will cause financial statements to tend to be biased because financial statements cannot describe the actual situation. Therefore, financial statements are not able to predict future cash flows.

Bootstrap Methods for Claims Reserving: R Language Approach

Bootstrap methods have been used by actuaries for a long time to predict future claims cash flows and their variability. This work aims to illustrate the use of bootstrap methods in practice, taking as an example the claims development data of the personal accident portfolio from the largest insurance company in Albania, over a period of 10 years. It is not the objective of this work to provide a theoretical analysis of the bootstrap methods, rather, this work focuses on highlighting the benefits of using bootstrap methods to predict the distribution of future claims development, and estimate the standard error, for a better risk assessment of liabilities within insurance companies. This work is divided into two well-differentiated phases: the first is to select the theoretical probability distribution that best fits the available claims dataset. Comparison of distributions is facilitated by the possibilities offered by the R programming languages. Both, the maximum likelihood parameter estimation method and the chi-square goddess goodness of fit test, are used to specify the probability distribution that best fits the data, among a family of predefined distributions. The results show that the Gamma distribution better describes the claim development data. The next phase is to use bootstrap methods, based on the selected distribution, to estimate the ultimate value of claims, the claims reserve, and their standard error.

Single Index Model: An Implication on Bankex Stocks

The objective of the study is to find out whether the Bankex stocks (17 bank stocks) are undervalued or overvalued with respect to the current Sensex high levels using Single Index Model. It also aims at finding out the future expectations from these stocks. In the financial economics literature, it is generally assumed that risk-averse investors expect higher returns for investing in relatively riskier assets and therefore, the risk premium represents the compensation to the investor for assuming risk. The non-zero risk premiums are not only directly unobservable but also vary substantially over time. Apart from the 'animal spirits' driving investor exuberance, short-term volatility in risk premiums could result from shifts in inflation expectations, monetary policy shocks, changes in market perceptions relating to the underlying 'fundamentals', all of which cause frequent corrections in expectations about future cash flows. The relationship between premiums or excess returns, representing the excess of expected returns over risk free returns and risk, measured by the volatility of market prices of assets is an intensely debated theme in the literature. In particular, the focus of empirical investigation has been on the dynamics of the risk-return relationship in equity markets. This paper undertakes an empirical verification of the rational markets excess returns and stock excess return based on Single Index Model.

The Effect of Cash Flow Presentation Method on Investors’ Forecast of Future Cash Flows

The decision usefulness of the direct versus indirect presentation method of a cash flow statement has been a long-standing issue in both practice and accounting research. By capitalizing on comparative advantages of experimental methods, we provide insights into how investors process the information contained in different presentation methods to make cash flow forecasts, especially in the context of various types of nonrecurring items. We predict and find that, when nonrecurring accrued expenses are present, the indirect method leads to lower forecast errors by activating investors’ underlying knowledge structures of operating cash flows in terms of an accrual (versus cash) basis. We also find that, in the presence of nonrecurring cash or nonrecurring accrued revenues, there is no difference in forecast errors between the indirect and direct methods. Moreover, we find that the combination of the direct and indirect methods (the direct-plus-indirect method) leads to lower forecast errors than the direct method, but it does not provide an incremental benefit for forecast accuracy beyond the indirect method. This paper was accepted by Brian Bushee, accounting. Funding: The authors acknowledge financial support from Chulalongkorn Business School, Korea University Business School, and the United Overseas Bank Endowment Fund. Supplemental Material: The e-companion and data are available at https://doi.org/10.1287/mnsc.2022.4406 .

Valuation of Business Restructurings in Germany – Part I: Economic Life of Businesses

For multinational enterprises seeking to engage in business restructuring in Germany, a lack of national legislation and inconsistent regulations are causing problems, including high exit charges and the risk of double taxation. The German tax legislation assumes an indefinite time frame of capitalization for the valuation of business restructurings, unless reasons can be provided for a definite useful life. Empirical evidence shows that there are prudent reasons why business restructurings should not be started from the premise of an indefinite capitalization period for the valuation of a transfer package, especially for whole business units. Most companies do not reach the mature age that would justify a projection of future cash flows into perpetuity. Moreover, research shows that the cumulated probability of default of a company behaves like a negative growth rate for the expected cash flows. Therefore, it is very likely that business restructuring transactions are overvalued, which results in a higher tax burden for the transferring entity, and the risk of double taxation increases.

DEVELOPMENT OF SCIENTIFIC AND METHODOLOGICAL APPROACH TO PRICING ON THE BASIS OF THE ENTERPRISE VALUE CRITERIA

The article develops a scientific and methodological approach to pricing based on the criterion of the firm (business) value and constructs economic and mathematical models of the optimal price for various conditions. The study is based on the fact that the criterion of business value, the firm should set prices in such a way as to maximize the market value of its entire property complex. For modelling purposes, this value can be determined based on a profitable methodological approach to valuation. That is, the optimal price level can be called one that corresponds to the solution of the optimization problem, where the objective function is the value of the entire property complex of the firm, and the variables are the prices of its products. Price models are based on the fact that according to the income methodological approach, the value of the integral property complex of the firm is defined as the current value of future net cash flow generated by the business that will use this integral property complex. From the standpoint of this criterion, the firm should set prices in such a way as to maximize the market value of its entire property complex. For modelling purposes, this value can be determined based on a profitable methodological approach. That is, the optimal price level can be called one that corresponds to the solution of the optimization problem, where the objective function is the value of the entire property complex of the firm, and the variables are the prices of its products. The author developed a general view of the objective function of this optimization problem for discrete and continuous models of cash flow, as well as approaches to business cash flow modelling depending on the nature of the relationship between demand for products (services) and their price, which is key to price modelling. A number of economic and mathematical price models have been developed for various conditions, which take into account the nature of the relationship between demand and price (including price demand elasticity), the structure of operating costs (primarily semi-fixed and variable parts), the need for investment, cost of capital, risk level and other factors. The application of the developed methodological approach and economic-mathematical models in the practice of pricing will increase the market value of the firm.

The firm size-leverage relationship and its implications for entry and business concentration

Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties, acquire new varieties from their inventors, and borrow against the future cash flow of the firm with the option to default. A variety can die with a constant probability, implying that firms with more varieties (bigger firms) have a lower variance of sales growth and, in equilibrium, higher leverage. In this setup, a drop in the risk-free rate increases the value of an acquisition more for bigger firms because of their higher leverage: they can (and do) borrow a larger fraction of their future cash flow. The drop causes existing firms to buy more of the new varieties arriving into the economy, resulting in a lower startup rate and greater concentration of sales.

One false step can make a great difference: Does corporate litigation cause the exit of the controlling shareholder?

Controlling shareholders dominate corporations and shareholder exit behavior is usually accompanied by the transfer of control. Using China's A-share listed companies as data from 2000 to 2017, this study investigates the effect of corporate litigation on the exit of controlling shareholders and related mechanisms for the first time. Empirically, we find that if a firm is involved in a lawsuit as a defendant, then the possibility of the controlling shareholder's exit increases. This finding is robust to various checks, including the parallel-trend assumption, placebo, instrumental variable tests, and the consideration of other potential factors. The tests reveal that this effect is mainly due to an increase in three aspects—the uncertainty of the firm's future cash flow, corporate risk, and external financing costs. Heterogeneity analyses find that contract lawsuits exhibit the strongest positive predictive powers over the subsequent exits of controlling shareholders. The firm's majority controlling shareholders, and institutional, non-family, and non-financial controlling shareholders are more likely to exit upon litigation.

PENGARUH LABA KOTOR, LABA OPERASI DAN LABA BERSIH DALAM MEMPREDIKSI ARUS KAS DI MASA MENDATANG (STUDI EMPIRIS PERUSAHAAN PERTAMBANGAN YANG TERDAFTAR DI BURSA EFEK INDONESIA TAHUN 2017-2019)

This study was conducted with the aim of explaining the effect of gross profit, operating profit and net profit in predicting future cash flows in mining companies listed on Indonesia Stock Exchange in 2017-2019. The population in this study were 49 mining companies listed on the Indonesia Stock Exchange in 2017-2019. The sampling technique in this study used purposive sampling so that the sample in this study was 13 mining companies on the Indonesia StockExchange in 2017-2019. The data analysis technique uses panel data regression with the Eviews 9 program. The results of data analysis in this study show that gross profit partially has no effect on predicting future cash in predicting future cash flows, operating profit partially has an effect on predicting future cash flows, net income partially influential in predicting future cash flows. Meanwhile, the result of the study also shows that simultaneously gross profit, operating profit and net income have an influence in predicting future cash flows.

The Effect of Gross Profit, Operating Profit and Net Profit on Future Cash Flow Prediction at the Company of Telecommunications Sub Sector on IDX in 2014-2019

This study was structured with the aim of knowing the effect of gross profit, operating profit and net profit on the prediction of future cash flows in telecommunications sub-sector companies listed on the Indonesian stock exchange. This research was conducted focused on the telecommunications sub-sector companies listed on the Indonesia Stock Exchange in 2014-2019. The sampling method used is purposive sampling. Through this sampling method, 5 companies were obtained that could be used as samples with a research period of 6 years. Therefore, in this study, the number of this study was 30 units of analysis. This study uses descriptive statistical analysis, correlation coefficient analysis, coefficient of determination analysis, simple regression analysis, and multiple regression analysis in analyzing all data. Testing the data used in this study is the partial t-significance test, the classical assumption test, and the F simulation test. From the research conducted, the results show that the gross profit and operating profit variables partially have no significant effect on future cash flows while the net income variable shows that partially significant effect on cash flows in the future. The variables of gross profit, operating profit and net profit simultaneously show a significant effect on future cash flows.

Free Markets to Fed Markets: How Modern Monetary Policy Impacts Equity Markets

The US Federal Reserve doubled its balance sheet during the COVID-19 pandemic in the most aggressive unconventional monetary policy on record. I show that the scale and scope of these actions substantially impacted stock markets, explaining at least one-third of their rebound. The impact occurs predominantly through bond yields (discount rates) and expectations of future macroeconomic conditions (future cash flows). I find while the Fed’s balance sheet expansions are more rapid than its contractions, the stock market is more sensitive to contractions. The findings have implications for possible impacts of central banks unwinding the positions accumulated during the pandemic.

Research on Financing Risk Factors of Expressway REITs in China with a Hybrid Approach

Finding sustainable measures for expressway financing has long been a significant issue owing to high demand for funds of expressway construction and maintenance of existing facilities. In the Chinese context of expressway financing it has become imperative to shift from indirect bank financing to Real Estate Investment Trusts (REITs). This research investigates the impact of various factors on the financing risk of expressway REITs and estimates the weight of the impact of various aspects and the link between the factors. We used literature review, keyword co-occurrence analysis and keyword cluster analysis methods to identify 19 risk factors that affect the financing of expressway REITs, then we classified factors into six dimensions: credit risk, underlying asset risk, operational risk, market risk, liquidity risk, and other risk. In addition, a multi-level hierarchical structure model was established by the Integrated Decision-Making and Trial Evaluation Laboratory (DEMATEL) and an interpretative structural model (ISM). The research finds that the project’s future cash flow under-expected risk, price risk, and counterparty limited risk are direct factors, the bankruptcy isolation of the underlying assets risk is a deep factor affecting the financing of expressway REITs, and other factors are indirect factors. This study fills the gap in financing risk of expressway REITs in the context of China and contributes to exploring and establishing the financing risks identification approach and risk factors in expressway REITs based on Chinese contexts. This research presents a theoretical foundation and methodologies for reducing the financing risk of expressway REITs projects and improving financing safety.

Implementation of Capm, Fama-French Three-Factor, and Five-Factor in Indonesia Stock Exchange and Cement Industry Sector

Weighting Average Cost of Capital (WACC) plays a critical role as a discounting factor of the corporate valuation process's estimated future free cash flow by highly influencing the valuation process. It consists of three components, namely cost of debt, cost of equity, and proportion of capital structure. Costs of debt and capital structure are easily calculated due to data stability and less volatility. Meanwhile, the cost of equity is difficult to determine due to assumption, the period taken, the method applied, and complexity. Many assets pricing methods are used to determine the required rate of return in equity, namely CAPM, Fama French Three-Factor (FF3F), and Fama French Five-Factor (FF5F). These three asset pricing models are used to determine the models with strong explanatory factors on equity return to portfolios developed from sorting FF5F factors and individual equity of four cement companies publicly listed in the Indonesia Stock Exchange (IDX).

The Crusin Lines: Asset Impairment, Ethical Issues, and Reputation Risk

ABSTRACTA real-world incident inspired this instructional case involving a highly publicized cruise ship mishap that signaled a possible impairment loss. The case requires students to apply fair value standards relevant to nonfinancial assets and perform impairment testing using United States Generally Accepted Accounting Principles (U.S. GAAP) and/or International Financial Reporting Standards (IFRS) in the context of judgment-based estimates of future cash flows, emerging incentives, and pressures facing the divisional chief financial officer (CFO). In addition to asset impairment calculations, the complexities of this situation challenge students to evaluate ethical issues, develop alternatives, and recommend a course of action for the divisional CFO. Finally, the case requires students to explore corporate reputation risk and the accounting implications for reputation-damaging incidents. This case can fit in an international accounting, intermediate, or graduate-level financial accounting course.

The usefulness of accrual-based surpluses in the Canadian public sector

This paper investigates the usefulness of accrual-based surpluses for predicting future cash flows and surpluses in the context of the Canadian public sector. We provide evidence that surpluses incrementally enhance the ability of operating cash flows to predict future cash flows and surpluses. Analysis of our accrual quality model illustrates that accrual accounting is useful in the public sector for mitigating the noise in operating cash flows. We also find that decomposing surpluses into operating cash flows and accruals enhances the ability of surpluses to forecast future cash flows and surpluses, indicating that aggregate and disaggregated surpluses are positively related to both relevance and reliability. Our test results do not indicate the presence of conservatism in the Canadian public sector, and confirm that the usefulness of surpluses in making predictions is independent of selected control factors.