Future Expected Cash Flows Research Articles

Corporate social responsibility and idiosyncratic risk in the restaurant industry: does brand diversification matter?

PurposeThis study aims to examine the link between corporate social responsibility (CSR) and idiosyncratic risk in the restaurant industry. The study also explores whether brand diversification magnifies the risk reduction effect of CSR in the restaurant industry.Design/methodology/approachThe study uses an unbalanced panel of 274 firm-year observations for 43 restaurant firms over the period 1995–2015. Models are estimated via fixed effect regression with robust standard errors.FindingsThe study finds that CSR involvement reduces idiosyncratic risk and this risk reduction is intensified when restaurant firms operate a portfolio of brands.Research limitations/implicationsThe study’s findings are limited to restaurant industry, therefore, generalization of the findings to other industries requires delicate care. Brand diversification is a simple brand count due to a lack of brand sales data.Practical implicationsCSR activities are not cost burden for restaurant firms. Indeed, CSR could be a viable strategy to reduce the volatility in future expected cash flows, hence the idiosyncratic risk. This risk reduction could help owners/managers access to capital with lower cost. Moreover, the study suggests that CSR practices should not be implemented in isolation from firm marketing strategy such as portfolio of brands.Originality/valueAlthough prior hospitality research puts forth some evidence using systematic risk as the measure of firm risk, this measure may not best suit the purpose in CSR context given that CSR is a direct, firm-specific strategy. Hence, the current study provides both new evidence with firm-specific, idiosyncratic risk and introduces an important contingency situation when the risk reduction effect of CSR would become more profound for restaurant firms.

Does managerial discretion affect the value relevance of goodwill impairment information under IFRS? Korean evidence

ABSTRACTThis study examines managers’ use of discretion in determining goodwill impairment losses and the differential value relevance of impairment information depending on the type of management discretion under IFRS in Korea. We distinguish management discretions into accelerated, timely, and delayed recognition of goodwill impairment. We find that impairment decision is driven by managerial incentives, such as big bath behaviour, income smoothing, and avoidance of loss reporting. Moreover, the impairment loss is positively (negatively) associated with contemporaneous share price and future expected cash flows, when managers recognize impairments in an accelerated (timely) manner. The positive association of accelerated impairment coincides with the negative value relevance of pre-impairment goodwill balance. We also observe that the accelerated impairers exhibit superior market performance in the 2-years subsequent to the reporting of goodwill-related information. Overall, the evidence documented in this study is in line with the positive valuation implication of accelerated discretionary impairment, consistent with a signalling perspective.

The Credit Quality and the Market- Based Performance of Banks: A Comparative Study

The Credit Quality and the Market- Based Performance of Banks: A Comparative Study Dr. Salah Ahmed ORABY Abstract This research aims at measuring the relationship between the credit quality measured by both non-performing loans % (NPL) and provisions for loan losses%(PLL) as independent variables and the market performance of banks measured by share prices.The sample study includes 11 Saudi listed banks in Saudi stock exchange and 15 banks listed in Jordanian stock from 2011 to 2016. This study used regression analysis and correlation analysis to analyze the quarterly data to test research hypotheses.Results of the Saudi case indicated that neither NPL% nor PLL has a statistically significant relationship with share prices and that can be interpret that investor in Saudi Arabia ignore both NPL and PLL when pricing shares of banks. On the other hand, results of the Jordanian case indicated that only PLLhave a statistically positive impact on share prices of banks.so it can be said that investors in Jordanian capital market look at part of provisions for PLL as a source of potential profit in future because they believe that PLL contain discretionary component used to manage earnings and used as signalingtool to shareholderson future expected cash flows. Also results indicated that both NPL and PLL are alternative measures should not be used together in the same model as predictors and PLL is better than NPL because PLL reflects both specific and general risk. Full Text: PDF DOI: 10.15640/ijat.v6n1a6

Market Value Creation through International Expansions: Evidence from Fortune Global 500 Firms

Although international expansion often enables firms to enhance their existing businesses, extant studies have not fully explained the drivers of international expansion success. Underpinning the belief that changes in a firm’s market value in response to an international expansion reflect the anticipated changes in the firm’s future expected cash flows resulting from this expansion, the author attempts to develop a theoretical model that may explain the effects of a firm’s international diversification on its market value creation and the moderating roles of the host-market type and the firm’s expansion strategy. The model is empirically tested using a sample of 253 international expansion announcements of firms listed in the Fortune Global 500 for the period between 2006 and 2015. Using an event study method and a linear modeling technique, the author finds that the international diversification of large international firms positively affects market value creation and that international expansions do not equally affect the market value across firms and markets. This manuscript is concluded with a discussion of important implications regarding theoretical and managerial contributions and research limitations some of which suggest plausible avenues for future research.

A Detailed Analysis of Fulfilling and Delinquency of Payments on a Loan

A new model for predicting the future expected cash flows from a loan is developed. It is based on a detailed analysis of the events of fulfilling, delinquency and default of each individual payment on the loan. The proposed model has significantly less uncertainty compared with the Markov chain model with the same detailing. The model is expected to have greater predictive power in comparison to the traditional models, and its usage will allow reducing the interest rate on the loan. The results of estimation of the probabilities of payments over time and the future expected cash flows from the loan with monthly equal principal repayment are given.

Public Private Partnership Contracts Financing by Covered Bonds

1. Introduction Sovereign entities of the western world rely the provision of public services (defense, public health, education, public infrastructures etc.), when tax revenues are not adequate, to a large extent on the financing through a considerable amount of unsecured public debt via issuance of unsecured senior bonds. In that way, by running controllable and scheduled public deficits, they can meet the needs of the general government extra financing as well as the required financing of public investments, and public services. On the other end, the States traditionally have on their considerable amounts of real assets (real estate and related infrastructures, as well as monopoly companies and special resources monopolies), many of them being potentially income generating assets. Recent experience has shown that, the government is not always the best manager of its on balance sheet real assets, let alone the managing of its public debt obligations. Also it is widely accepted that the private sector is usually more efficient in pricing, developing, managing and operating business (and therefore managing the related risks) in a competitive environment, with limited resources. As a consequence, Public Private Partnerships evolved as an alternative form of asset exploitation, between governments and competitive private companies, where each of the two partners brings to the contract its comparative advantages, in order to make the final partnership viable and profitable for both participants. Such structures that efficiently exploit assets and monopoly structures of the government through appropriate management from private sector companies, produce efficiently public services and manage to their full income generating potential, public assets, utilizing therefore the public property with private sector competitive standards. The appropriate pricing of the expected cash flows of the contract from both sides, taking into consideration all the possible aspects of the project is very important for the negotiation process, and selection of the preferred private partner. Optimal pricing and efficient selection of the private entity are significant parameters for contract's viability and profitability for all related parties. Once a PPP is initiated on an existing asset or an asset to be built and run by a private company, this contract is the base of a stream of future expected cash flows, as well as residual value, and subject to many kinds of pricing risks, having an overall net present value as any other real income generating asset, priced in the market. Thus far, using the example of many European countries, the issuance of public debt for the financing of government deficits was by the issuance of senior unsecured bonds. In case of default or partial default of the issuer country, the investors have full recourse against the assets of the issuer but only on theory. In practice investors will experience a loss in interest income or redemption amount or even both, depending on restructuring type. After the Global financial crisis of 2007-2008 the market has shifted its focus in more efficient pricing of default risk and especially in pricing the Sovereign default risk, of many heavily indebted countries, including Greece among others. The subsequent result was a general widening of yield levels of many sovereigns and in many cases in levels where the traditional market channel of funding became unavailable to the State. Sovereign States were in the midst of a crisis where due to the economic downturn, fiscal consolidation was needed while public investments and services needed also a boost in order to compensate for the deterioration of private investments and consumption, and all these in an environment with higher credit spreads, less liquidity and more risk averse investors. On the side of these, as history has shown, the private sector, and especially private banks in many countries around the world, were able in similar situations, of credit squeezes and illiquid markets, to refinance their balance sheet by the issuance of covered bond schemes, achieving market acceptability and substantially lower cost of funding, when the senior unsecured debt was prohibitively expensive for them to consider. …

Earnings Management Through Deferred Taxes Recognized Under IAS 12: Evidence From Pakistan

This study examines earnings management through deferred taxes calculated under the IAS 12 and its impact on firm valuation. The literature finds that book–tax nonconformity leads to better earning quality and a greater association between earnings and future expected cash flows. Given that Pakistan is a pioneering implementer of the International Financial Reporting Standards, our hypothesis is that the components of deferred tax disclosed under the IAS 12 provide value-relevant information to equity investors. We divide deferred tax components into three categories: those arising from (i) operational activities, (ii) investing activities, and (iii) financing activities. These are subdivided to ensure that no value-relevant component is aggregated with a nonvalue-relevant component, which might otherwise lead to an information slack. Our sample includes data on shariah-compliant companies listed on the Karachi Meezan Index (KMI-30). We find that deferred tax line items in firms’ balance sheets are reflected in market prices. Investors also tend to treat deferred tax line items (arising from operating, financing, and investing activities) differently. Furthermore, the value relevance is dissimilar for different components of deferred tax. Investors are wary of deferred tax assets and liabilities when pricing and are likely to penalize firms with a higher deferred tax position.

Bank loan spread and private information: pending approval patents

This study examines a specific source of lenders’ ex ante information advantage, private information about borrowers’ forthcoming patents. We examine this setting to provide evidence of the impact of such private information on borrowers’ cost of debt. We find evidence consistent with lenders incorporating private information by charging borrowers with forthcoming patents a lower spread than borrowers that lack that private information. We document a negative association between loan spread and the citation count on forthcoming patents, consistent with borrowers providing lenders with detailed information regarding future expected cash flows from forthcoming patents and lenders responding through a reduction in interest costs for those borrowers. We also show that the reduction in loan spreads is related to the expected value of the forthcoming patent and is greater for borrowers with higher initial information uncertainty and default risk, and when the lead lender has greater loan concentration in the borrower’s industry. Our results suggest that forthcoming patents are a significant source of private information useful to borrowers and employed by lenders.

Space Exploration and Money Mechanics: An Evolutionary Challenge

In order to invent, develop, and build the technology of space, now and in the future, we need billions and billions of dollars to finance a massive research, innovation, and development drive. I argue that humanity's space potential is closely tied to humanity's financial wisdom, such that travel into deep space may very well be possible after we have transformed our current money creation methodologies. Current money mechanics is founded on debt and credit. A debt based monetary architecture chains the species to calendar time payments, and thus makes the financing of space projects challenging given the time pattern of future expected cash flows and the immeasurable risks involved. In fact, interstellar travel poses a challenge to the very principles of financial valuation theory and practice, i.e., time value of money and risk and return. In other words, there is no identifiable discount rate for building starships. Thus, the creation of future space infrastructure may require some form of public debt-free financing. The recently announced 40 billion dollar monthly injections of new money by the Federal Reserve into the banking system are being executed via the purchase of mortgage backed securities from the banks. As the creators of money, we are and should be in a position to design and implement an alternative financial product, just as valid as a mortgage backed security, that will channel at least one of Fed's next monthly injections into space exploration and NASA. This is possible through Public Capitalization Notes, which facilitate debt free money injection into real projects. We may need to transform money mechanics before we can reach deep space, and Curiosity on Mars in the midst of a financial turmoil lights the path to human creativity.

Another Look at the Stock Return Response to Monetary Policy Actions*

I analyze the effect of monetary policy actions on the cross-section of equity returns. Based on earlier theoretical work for the monetary transmission mechanism one can argue that changes in monetary policy should produce differentiated effects on firms and stocks with different characteristics. By using different portfolio sorts the results show that the impact of monthly changes in the Federal funds rate is greater for the returns of more financially constrained stocks (e.g., small and value stocks) than on the returns of stocks with a more favorable financial position (e.g., large and growth stocks). By using a VAR methodology, the results indicate that the negative effect of Fed funds rate shocks on stock returns comes from a corresponding negative effect on future expected cash flows (cash-flow news), which is stronger than the impact on future equity risk premia (discount rate news). Thus, cash-flow news is the main return component affected by changes in the Fed funds rate. These results are reasonably robust to different VAR specifications. Moreover, the dispersion in return responses to monetary shocks across stocks is explained by a similar dispersion in the effects into cash-flow news, which outweighs the dispersion in discount rate news betas. These results represent new evidence on the effect of monetary policy on stock prices and on the monetary transmission mechanism.

Estimating cost of capital in firm valuations with arithmetic or geometric mean – or better use the Cooper estimator?

We test the extent and determinants of bias effects of the arithmetic as well as the geometric mean estimator and the estimator of Cooper [1996. Arithmetic versus geometric mean estimators: Setting discount rates for capital budgeting. European Financial Management 2 (July): 157–67] regarding discount rate estimation for firm valuation by way of a bootstrap approach for 13 different countries. The Cooper estimator is superior to both the geometric and the (conventional) arithmetic mean estimator. However, a ‘truncated’ version of the arithmetic mean estimator leads generally to better estimation outcomes than the Cooper estimator. This means that, in order to reduce problems of upward-biased firm value estimates, expected cash flows beyond a certain time horizon are completely neglected in terminal value estimation. Such an approach seems particularly reasonable for the valuation of young growth companies as well as for companies from quickly developing countries such as Brazil, China, or Thailand, because the bias in terminal value estimation is increasing in the growth rate of future expected cash flows.

Bank Loan Spread and Private Information: Pending Approval Patents

This study examines a specific source of borrowers’ proprietary information and lenders’ ex ante information advantage, i.e., private information about the borrowers’ forthcoming patents. We examine this unique setting, where borrowers have credible information regarding a positive future event – the granting of a patent, to provide evidence of a specific source of and benefit from proprietary information. We find evidence consistent with lenders incorporating such proprietary information in the loan contract by charging borrowers with private information a lower spread than borrowers that lack that information. We also document a strong negative association between loan spread and the citation count on the newly granted patents, consistent with borrowers providing lenders with detailed information regarding the future expected cash flows from the forthcoming patents and lenders responding through a reduction in interest costs for those borrowers. Moreover, our cross-sectional tests show that the reduction in loan spreads is greater for borrowers with higher initial information uncertainty and default risk at loan initiation, and when the lead lender has greater loan concentration in the borrower’s industry. Finally, we document that the negative association between the patent information and loan spreads holds primarily among borrowers with shorter patent-to-cash cycles in longer-term loans (where there is a greater likelihood that the patent will generate positive cash flows during the loan term), consistent with lenders relying on patent-specific information in setting spreads. Our results suggest that patent pending approvals are a significant source of proprietary information useful to borrowers and employed by lenders in setting spreads.

Another Look at the Stock Return Response to Monetary Policy Actions

I analyze the effect of monetary policy actions on the cross-section of equity returns. Based on earlier theoretical work for the monetary transmission mechanism one can argue that changes in monetary policy should produce differentiated effects on firms and stocks with different characteristics. By using different portfolio sorts the results show that the impact of monthly changes in the Federal funds rate is greater for the returns of more financially constrained stocks (e.g., small and value stocks) than on the returns of stocks with a more favorable financial position (e.g., large and growth stocks). By using a VAR methodology, the results indicate that the negative effect of Fed funds rate shocks on stock returns comes from a corresponding negative effect on future expected cash flows (cash flow news), which is stronger than the impact on future equity risk premia (discount rate news). Thus, cash flow news is the main return component affected by changes in the Fed funds rate. These results are reasonably robust to different VAR identifications. Moreover, the dispersion in return responses to monetary shocks across stocks is explained by a similar dispersion in the effects into cash flow news, which outweighs the dispersion in discount rate news betas. These results represent new evidence on the effect of monetary policy on stock prices and on the monetary transmission mechanism.

Do Firms Manage Fair Value Estimates? An Examination of SFAS 142 Goodwill Impairments

Abstract: I find that goodwill write‐offs under Statement of Financial Accounting Standards No. 142 (SFAS 142) are associated with future expected cash flows as mandated by the standard. However, there are indications that goodwill write‐offs lag behind the economic impairment of goodwill. Additional analysis reveals that the association between goodwill write‐offs and future cash flows is insignificant for firms with contemporaneous restructuring. I hypothesize that this finding is due to agency‐based motives. Finally, I examine a sample of non‐impairment firms in which there are indications that goodwill is impaired. I fail to find convincing evidence that these firms are opportunistically avoiding impairments.

Do Firms Manage Fair Value Estimates? An Examination of SFAS 142 Goodwill Impairments

I find that goodwill write-offs under Statement of Financial Accounting Standards No. 142 (SFAS 142) are associated with future expected cash flows as mandated by the standard. However, there are indications that goodwill write-offs lag behind the economic impairment of goodwill. Additional analysis reveals that the association between goodwill write-offs and future cash flows is insignificant for firms with contemporaneous restructuring. I hypothesize that this finding is due to agency-based motives. Finally, I examine a sample of non-impairment firms in which there are indications that goodwill is impaired. I fail to find convincing evidence that these firms are opportunistically avoiding impairments.

Estimating Cost of Capital in Firm Valuations with Arithmetic or Geometric Mean - Or Better Use the Cooper Estimator?

We test the extent and determinants of bias effects of the arithmetic as well as the geometric mean estimator and the estimator of Cooper (1996) regarding discount rate estimation for firm valuation by way of a bootstrap approach for thirteen different countries. The Cooper estimator is preferable only for firms with small growth rates of future expected cash flows, while for moderate to high growth rates the “truncated” arithmetic mean estimator should be applied. This means that, in order to reduce problems of upward biased firm value estimates, expected cash flows beyond a certain time horizon are completely neglected. Such an approach seems particularly reasonable for the valuation of young growth companies as well as in general for companies from quickly developing countries like Brazil, China, or Thailand.

The Usefulness of Book‐to‐Market and ROE Expectations for Explaining UK Stock Returns

Abstract: The fundamental valuation perspective on stock returns suggests that book‐to‐market will be positively related to returns if market value of equity equals future expected cash flows discounted at the expected return and book value proxies for future cash flows. Building on this perspective, we develop a log linear model which includes expectations of future BM and ROE in addition to current BM as explanatory variables for future stock returns. We show that these three variables explain a significant part of UK cross‐sectional stock returns and that they remain highly statistically significant after including additional risk proxy variables. This supports relevance of fundamental valuation based firm characteristics for explaining stock returns and indicates their potential usefulness for predicting future stock returns.

EMERGING EQUITY MARKETS: ARE THEY FOR REAL?

AbstractUsing the methodology developed by Fama (1990) and Schwert (1990), we measure the degree to which six of the largest emerging equity markets in Latin America and Asia are rational in the sense that they incorporate domestic and global shocks to future expected cash flows and time variation in the discount rates that price these flows. The Chilean, Mexican, and, to a lesser extent, Malaysian markets appear more rational than either the Korean and Taiwanese markets or the base case U.S. and Japanese markets. However, we argue that numerous factors make the methodology unable to rank markets by relative efficiency. We also find evidence of the influence of real global variables on the Taiwanese and Korean markets.

One-Time Charges: Never Having to Say You're Sorry?

Although financial analysts sometimes dismiss one-time charges to company earnings as unimportant, stock returns appear to suffer significantly during periods of frequent one-time charges. Distinguishing among types of one-time charges is important. Some charges represent sound economic decisions that the market appears to recognize. One-time charges relating to accounting changes usually reflect catching up with past events (e.g., recognizing the true cost of postretirement benefits). These charges can result in companies changing policy going forward. The charges that appear most problematic are restructuring charges and those taken for discontinued operations. When such charges occur frequently, they may yield insights into future expected cash flows and the quality of companies' management.

Stock returns and real activity: A structural approach

This paper analyzes the relationship between stock returns and real activity from the point of view of a general equilibrium, multicountry model of the business cycle. The empirical evidence suggests that there is a relationship between domestic output growth and domestic stock returns which becomes stronger when foreign influences are considered. We study the properties of a model with two sources of disturbances and three mechanisms of transmission across countries. We show that the model can best reproduce the actual data when technology shocks drive the cycle and when there is a common international component to the shocks. The strength of association between stock returns and output growth depends on how future expected cash flows respond to the disturbances. International linkages emerge because foreign variables contain information about the future path of domestic variables.