Cash Flow Generation Research Articles

INNOVATION INVESTMENT: BEHAVIOUR OF CHINESE FIRMS TOWARDS FINANCING SOURCES

Although the extant literature on corporate finance has largely focused on capital investments, relatively less attention has been paid to identify how research and development (R&D) related investments are financed. This study empirically tests the relationship between the different financing sources used by firms and their intensity of R&D in the rapidly growing economy of China. Furthermore, we posit that the firm’s choice to adopt the finance source for R&D will change if the firm is likely to be in financial constraints. This study finds out an empirical evidence that internally generated cash flows, bank debt, and seasonal public offerings (SPOs) stipulate a positive impact on R&D of Chinese firms, whereas the issuance of bond impacts it negatively. The study also confirms that financially constrained firms perceive the impact of financing sources on their R&D differently than non-financially constrained firms do. Results also slightly differ between high-tech and non-high-tech firms.

Financial performance assessment of electricity companies: evidence from Portugal

The assessment of the efficiency performance of the electricity sector has been the focus of attention of several studies, but there is a lack of scientific literature specifically addressing the financial performance of electric utilities during the period mainly impacted by the financial turmoil in the world’s financial markets. Hence, this paper is aimed at assessing the financial performance of regulated companies operating in the Portuguese electricity market from 2010 to 2014, a period particularly marked by the financial assistance provided to the Portuguese government. With this objective in mind, we propose a modelling framework which combines the use of the generalized method of moments estimation method with data envelopment analysis. The generalized method of moments estimation method allowed us to select the intrinsic corporate variables that were then used to assess the financial performance of electricity companies through the slacks-based measure model. In this framework, the return on equity, the leverage and the cash flow to total assets were selected as outputs, while the values of depreciations and amortizations to total assets have been regarded as inputs. Our findings suggest that both in 2010 and 2014 the majority of non-efficient companies should foster the investment in new fixed assets in order to become efficient. Additionally, in both periods, the majority of inefficient electricity companies should further increase their return on equity in order to become efficient, highlighting the role of this financial indicator in the explanation of financial efficiency. Moreover, in 2014, non-efficient companies are able to efficiently generate cash flows since almost no adjustments are required regarding the cash flow to total assets values attained for these companies. Finally, the need to promote leverage in order to increase financial performance is more evident in 2010 than in 2014, signalling the need to reduce the level of debt of these companies in this period.

Financial constraints and the interdependence of corporate financial decisions

Purpose This paper aims to examine the interdependence of financial decisions (investment, financing, dividends and cash-holding) under financial constraints. Design/methodology/approach The authors specify and estimate a system of simultaneous equations with panel data and firm fixed effects by three-stage least squares in a sample of firms from 62 countries from 1996 to 2010. Findings The main findings largely corroborate previous studies regarding the interdependence of financial decisions. The authors also find evidence suggesting that financial constraints have a major impact on firms’ financial decisions. The results also suggest that financial constraints manifest themselves in virtually all firms, indicating that such constraints are a matter of degree and not of kind. Research limitations/implications Implications regarding the impact of cash flows on investment and cash-holding decisions are only partially confirmed. Practical implications The results are consistent with the hypothesis that financial constraints distort the financial policies of firms. For the purpose of formulating policies that reduce these distortions, the authors emphasize the role of the availability of internal funds and the recoverable fraction of assets in easing financial constraints, thus allowing for greater investment on the part of firms. Social implications The results suggest that regulators should promote policies that reduce the dependence of corporate investment on internally generated cash flows. Originality/value Unlike previous studies, the authors account for the direct impact endogenous variables could have on each other. In addition, they explore the impact of each country’s particular legal environment on the pledgeability of assets at the company level.

Patent Pools Securitization Based on Convertible Tranche

The securitization of patent pools, especially the introduction of patents from institutions of higher education and research institutes, has always been a difficult problem. It is more difficult to generate cash flow from the early stage patent pools of industrial development. The technical standards have not yet been formed, and the income of patent pools is uncertain. Therefore, cash flow is uncertain. It is necessary to study new incentive compatibility mechanism to generate revenue. The paper, drawing lessons from the design principles of REITs products and method of convertible tranche, propose the method to design patent pools funds. The securitization needs to give a full consideration to the nature of the bond and stock ownership characteristics of the patent pools. This is conducive to the realization of incentive compatibility, so as to attract government and social capital to participate in securitization.

Foreign currency invoicing of domestic transactions as a hedging strategy: evidence for Uruguay

ABSTRACTThis study is an empirical analysis of the factors associated with the use of the US dollar for the invoicing of domestic transactions, which is a common practice of Uruguayan firms. Using a novel dataset we find that both the input and debt structure of firms are relevant for determining their currency of invoicing. Intuitively, firms will generate cash flows in US dollar if they have to make expenditures in foreign currency, either because they use imported inputs or if they cover debt services with currency risk. This practice can be seen as a hedging strategy to mitigate exchange risk in a highly dollarized economy. We empirically show that firms use their flows position to hedge currency mismatches in their stocks; domestic invoicing in US dollar is correlated with large negative financial positions, and the share of imported inputs and of exports.

Financial liquidity management in energy sector in Poland

Liquidity comprises one of the most important indicators of an enterprise’s financial situation and proper operation. Dynamic liquidity understood as an ability to generate cash flow constitutes an interesting issue in the area of managing finances related with taking managerial decisions in the following areas: operational, investment and financial. The aim of the article is to identify cash flow in a managerial perspective for the purposes of taking decisions with regard to developing liquidity and indicating determinants thereof in the energy sector, in Poland. Formulas of setting cash flows for the owner (FCFE) and for all funding parties (FCFF) have been shown and their calculation has been presented with an example of selected energy enterprises listed on the Stock Exchange in Warsaw.

Chinas airline industry deregulation: assessing the impact on the operational performance of dominant carriers

This paper analyses the operational efficiency of the big three Chinese airline carriers post deregulation from the managerial perspective, using empirical data and by means of parametric methods in order to further understand the potential this market has for its dominant carriers. The analysis uses financial and operational data for the three dominant carriers in the Chinese airline industry and estimates the effect deregulation has had over a period from 1994-2012 to the dominant carriers. This analysis validates that the Chinese airline industry operational efficiency as measured by revenue and cash flow generation ability is positively associated with the load factor within a period that includes deregulatory initiatives. This finding highlights that the airlines have reacted positively post deregulation and have reasonably coped with competitive forces. Thus a further airline industry convergence is expected, on a global scale. This convergence will positively affect the Chinese airline industry, which in turn will benefit the passengers in terms of technology innovation, prices and welfare status.

Methodology for assessing the economic efficiency of investment projects in petrochemical companies

The article focuses on the issues of investment potential of petrochemical companies and the need to develop a unified approach transparent for all the participants, to assess the efficiency of investment projects in petrochemical companies. The proposed methodology is to be applied to scheduling project costs and in fact, to ground the establishment of annual financing limits for a project. Additionally, the methodology is expected to reflect the possibility of updating the main indicators, both for financing the purchase of domestic and imported equipment. The methodology also takes into account the mechanism of contract pricing, recalculation of the cost of works and services is performed according to the rules and regulations approved for the estimates in any petrochemical company, inclusive of the indices of changes in current estimated cost to base period prices. The proposed methodology for assessing the performance indicators of investment projects is one of the most multi-faceted and optimal tools for petrochemical companies for attracting additional funding from both their own and other sources. In the conditions of growing business volumes, and in case of complying with the recommendations of the state strategy for the industry growth until 2030, the proposed methodology is transparent and relevant to all the investment participants in terms of cash flow generation for the project.

Cash flows of enterprises: their assessment and analysis

The processes taking place in the economy in recent decades clearly demonstrate that the economic and social stability of society depends on the financial stability of enterprises. One of the most important signs of financial stability is the ability of an enterprise to generate cash flows. The presence of money from the enterprise determines the possibility of its survival and directions for further development. Any company in the course of its activities has a need for financial resources necessary for the implementation of relationships with other legal entities and individuals. The uninterrupted circulation of cash flows in the reproduction process means the fulfillment of obligations to the budget, partners, the absence of overdue debts to the enterprise and the enterprise itself, normal solvency, necessary financial stability, creditworthiness and profitability. The cash flow of an enterprise is a continuous process. For each direction of funds use there must be an appropriate source. In a broad sense, the assets of an enterprise represent the net use of cash, and liabilities and equity are net sources. A research aim was to conduct the all-round analysis of enterprise money forming streams, estimate the degree of sufficientness and efficiency for providing of their balanced and synchronization. For realization of the put aim tasks are pulled out: to find out the value of money streams in activity of menage subjects; to conduct the analysis of certain enterprise money forming streams; to carry out the estimation of composition, dynamics and efficiency of enterprise money streams management. Research methodology is folded by the scientific methods of cognition and special, in particular, economic and statistical methods (comparison, grouping, tabular, graphic, standardizations of investigated phenomena indexes), economic and logical methods (elimination, vertical, horizontal, coefficient analysis) which provided the solution of the tasks in the chosen research direction. The article discusses the nature and characteristics of cash flows. The above classification and sources of cash flow. On the example of agricultural enterprise "Sloboda " was estimated efficiency of cash flow. The main activities of the enterprise are: the cultivation of grain crops (except rice), legumes and oilseeds; breeding dairy cattle; breeding pigs; sugar production; breeding other animals; auxiliary activities in crop production. The input streams of this company are 100% solely cash from operating activities. Having considered the structure of the PSP “Sloboda” initial cash flows for 2015-2017, we can say that the main share of cash flows from operating activities (80-90%), from investment activities – 10-20%. Conclusions were made on improving the efficiency of cash flows. With the aim to increase cash flows of private agricultural enterprise "Sloboda" management efficiency it is necessary: to attract in practice the calculation of money streams indexes system as measuring devices of financial firmness and solvency; to study area conformities of money law streams and take them into account in practice and analysis of enterprise; to determine streams in registration, including operative, and information for timely forming of the extended dataware of enterprises cash flow analysis; to perfect money streams methodology of analysis; to take into account the factors of enterprise money motion in the conditions of vagueness and risk. Key words: cash, incoming cash flows, cash outflows, cash flow analysis, efficiency, profitability, liquidity, agricultural enterprise.

Investment-Cash Flow Sensitivities Are Very Probably Not Valid Measures of Financing Constraints: on the Accounting Partial Identities Problem

This experiment uses a Monte Carlo simulation designed to test whether the problems about the use of accounting identities are present in the model of Fazzari, Hubbard, and Petersen (1988). The Monte Carlo simulation creates 10,000 sets of randomly generated cash flows, Tobin’s Q, and an error term variables, which in turn shape an investments variable that depends on them. These two variables are also related through an accounting semi identity or accounting partial identity (API). OLS estimations verify that estimated coefficients do not represent reality. The closer the data are to the accounting identity, the less the regression will tell about the causal relation.

Allocation of internally generated corporate cash flow in Africa

PurposeThe purpose of this paper is to examine how managers of African firms, operating in environments characterised by less developed capital markets and weak institutional structures, make use of their internally generated cash flows.Design/methodology/approachThe authors use a panel data methodology which regresses a particular use of cash flow (e.g. capital expenditure) on the internally generated operating cash flow of a firm and a set of control variables. The estimation of the regression model is done by ordinary least squares regressions. For robustness, the authors also estimate the models using system generalised method of moments to control for endogeneity and measurement error problems.FindingsThe authors find that managers of African firms hold most of their internally generated cash flows, and when they decide to spend, they allocate a higher proportion towards dividend payments; followed by debt adjustments; then to investments; and lastly, to equity repurchases.Research limitations/implicationsThe findings are consistent with the existence of a significant financial constraint in African markets, and the use of dividends to signal credit quality in relatively underdeveloped capital markets.Originality/valueThe authors provide a more extensive analysis of how a firm spends a unit of the incremental cash flow it generates. In particular, the analysis shows that beyond investments in capital expenditure, other cash flow uses (i.e. cash holdings, dividend payments, and adjustments in debt and equity capital) which have been largely overlooked in the literature are important to understanding the effects of financial constraints on corporate decisions. Also, the early empirical evidence on the cash flow allocations of African firms could be a step in the right direction in informing theory development in this area.

Accounting Standard Setting and Investor's Learning

This paper examines how the investor's belief about the project's ability of generating cash flow affects accounting standard setting. It proves analytically that the accounting standard in the Stackelberg equilibrium of the static model increases with the increase in the investor's belief about the upper bound of the project's ability of generating cash flow. In addition, assuming that the investor revises his belief upwards about the upper bound of the project's ability of generating cash flow based on the past realizations of the project's ability of generating cash flow, and assuming that the standard setters revise the accounting standard accordingly with a cost, this paper proves that with probability one, as time goes to infinity, the investor's belief about the upper bound of the project's ability of generating cash flow converges to the true one and the accounting standard in the Stackelberg equilibrium converges to a number smaller than the one in the static model. In the limit, the investor becomes informed about the upper bound of the project's ability of generating cash flow and a higher expected value of the investment project is achieved.

Accounting Standard Setting in the Presence of Uninformed Investors

This paper constructs a model of a standard setting game among informed and uninformed investors, an auditor and standard setters to examine how accounting standard setting interacts with informed and uninformed investors' investment decisions. It proves that the levels of investments of informed and uninformed investors increase with the increase in the accounting standards in the case of bad report (about the project's ability of generating cash flow) being issued by an auditor; however, in the case of good report (about the project's ability of generating cash flow) being issued by the auditor, the levels of investments of informed and uninformed investors can move in the opposite directions as the accounting standard increases. In addition, this paper shows that regardless of investors being informed or not about the project's ability of generating cash flow, the Stackelberg equilibrium accounting standard can lead to a positive expected value of the project.

CFEBT Risk Triangle as a Tool for Detecting and Evaluating Risks of Accounting Records: a Case Study

The objective of the present contribution is to evaluate the risk of accounting errors and frauds in small companies predominantly operating in agriculture. It is based on an analysis of the CFEBT risk triangle for financial statements reported for the years 2012–2016. The CFEBT risk triangle is applied in form of a case study aimed at risk detection of occurrence of accounting errors and frauds for a selected sample of companies. A detailed analysis of a risk of impact of accounting errors and frauds is illustrated in the case study of an accounting unit chosen from the sample of companies evaluated. Results of the presented case study into the detection and evaluation of the risk based on interconnections between the reported profit (loss) and the generated cash flow during 5 accounting periods confirm the significance of having a complex view for decision making of users based on reported accounting records and accounting data. Future research into the CFEBT risk triangle focuses on performance of complex analyses for individual types of business activities of small and middle-sized companies in the context of Czech accounting standards and IFRS.

CFDs, forwards, futures and the cost-of-carry

We show that contracts for difference (CFDs) may be viable substitutes for forward contracts and may have some features that are preferable to futures contracts. We develop parity relations between CFDs, forwards, and futures contracts using simple cost-of-carry arguments. We use these parity relations to consider whether exchange listed stock index CFDs might be viable substitutes for exchange listed futures contracts. Using the S&P/ASX 200 stock index we find that listed CFDs (ignoring an open interest charge) generate cash flows similar to listed futures contracts. Our analysis considers stochastic interest rates and uncertain dividend payments by the shares in the index.

Private Student Loan Origination in Hindsight: What the Litigation Paper Trail (in PDF) and SEC Filings Can Tell Us About the National Collegiate Student Loan Trust Debacle

In 2007 the First Marblehead Corporation launched the last quartet of bankruptcy-remote student loan securitization trusts (bringing the total to 15) through its subsidiary, the National Collegiate Funding LLC. A large proportion of the private student loans were originated through direct advertising and marketing to consumers (DTC), rather than through school financial aid offices (school-channel). The loans were combined into pools and sold to statutory trusts set up as investment vehicles, which purchased the loans with the proceeds of bonds sold to institutional investors. The students’ installment payments on their loans would then be used to repay interest and principal to the bondholders and generate residuals for the trust certificate holders. Up-front, however, the FMC paid itself more than 88 million from the surplus proceeds of each securitization transaction, the equivalent of about 8% of the loan balance. Its capital contribution to the trust through National Collegiate Funding, LLC, one of the two original trust certificate holders, was a merely nominal $1.00 per trust. Ten years down the road, and half way through the nominal 20-year amortization period, many of the loans originated in 2007 had gone into default, but were not necessarily beyond the statute of limitations thanks to the grant of forbearances that had deferred default. As the number of loans not generating cash flows increased, collection turned into litigation. This paper sheds light on how these loans came into being, drawing on SEC filings and a systematic review of a sample of NCSLT collection cases filed in 2017 in Texas. It concludes that these private student loans were high-cost loans originated under false pretenses because borrowers were not provided with timely, adequate, and accurate disclosures about the future cost of the loans: - The Interest Rate was understated because it was shown as a Margin percentage to be added to LIBOR on the loan application, rather than as the sum of LIBOR Margin (APR). - The Origination Fee was shown as a percentage on the application, but the actual fee in dollar terms was a higher percentage relative to the approved and disbursed loan amount, and the fee was immediately added to principal with the result that the borrower owed considerably more than he or she received in proceeds from day one. - The cost of the loans was further driven up by capitalizing not only of the Origination Fee, but the interest accrued during the in-school deferral period and thereafter. While the same model of loan origination had been used in early iterations, the 2007 iterations were characterized by both higher Margin rates and higher Origination Fee percentages, which made most of the loans much more costly relative to earlier vintages. The high-cost nature of these loans, however, was critical to their marketability to investors because the high interest rate margin promised high yields. And it was also critical to maximizing the upfront fee taken by the First Marblehead Corporation as arranger, which was funded from the proceeds the Trusts received from the issuance of the bonds.

Investigating the feasibility of a reuse scenario for textile fibres recovered from end-of-life tyres

The management of end-of-life tyres (ELTs) is regulated by several national and international legislations aiming to promote the recovery of materials and energy from this waste. The three main materials used in tyres are considered: rubber (main product), which is currently reused in other closed-loop applications; steel, which is used for the production of virgin materials; and textile fibres (approximately 10% by weight of ELTs), which are mainly incinerated for energy recovery (open-loop scenario).This study aims to propose and validate a new closed-loop scenario for textile fibres based on material reuse for bituminous conglomerates. The final objective is to verify the technical, environmental, financial, and economic feasibility of the proposed treatment process and reuse scenario. After characterization of the textile material, which is required to determine the technological feasibility, a specific process has been developed to clean, compact, and prepare the fibres for subsequent reuse. A life cycle assessment (LCA) has been carried out to quantify the environmental benefits of reusing the fibres. Finally, a cost benefit analysis based on the LCA results was conducted to establish the long-term financial and economic sustainability.From a technological point of view, the tyre textile fibres could be a promising substitute to the reinforcement cellulose commonly used in asphalts as long as the fibres are properly prepared (compaction and pellet production) for application in the standard bituminous conglomerate production process. From an environmental point of view, relevant benefits in terms of global warming potential and acidification potential reduction were observed in comparison with the standard incineration for energy recovery (respectively −86% and −45%). Moreover, the proposed scenario can be considered as financially viable in the medium to long term (cumulative generated cash flow is positive after the 5th year) and economically sustainable (expected net present value of more than €3,000,000 and economic rate of return of approximately 30%). Finally, the sensitivity and risk analyses show that no specific issues are foreseen for the future implementation in real industrial applications.

The Option Value of Vacant Land and the Optimal Timing of City Extensions

Classic real options theory rests on two debatable assumptions: projects require a fixed investment and generate cash flows that follow a random walk. Relaxing both assumptions leads to radically different conclusions regarding the optimal timing of investment. We model investment using a Stone-Geary production function (Leontief and Cobb-Douglas are special cases) and growth as a mean-reverting Brownian motion. The solution method for this option valuation problem is non-trivial because the state space is two dimensional (level of the cash flow and its growth). For Leontief, the optimal policy is intuitive; the moment of investment involves a trade-off between the level of the cash flow and its growth. For Cobb-Douglas, in contrast, the optimal moment of investment depends only on the growth. More surprisingly, investment should be delayed when growth is high. This conclusion persists in the general Stone-Geary case. Applied to urban real estate, this suggests that up to 20% of cities should delay new construction because of high growth. The option value of vacant land may represent 60% of the value of new construction. High prices of vacant land may thus result from rational investor behavior rather than regulatory inefficiency. Our analysis should be widely applicable, for example to investment in high-growth companies.

The influence of capital expenditures on working capital management in the corporate sector of an emerging economy: the role of financing constraints

Relying on firm-level panel data from an emerging economy, this study explores the impact of fixed capital expenditure on working capital management practices. When facing insufficient internally generated cash flows and external funds for accommodating capital investments, companies are found to finance capital expenditure by primarily depleting cash reserves and increasing trade payables. Corroborating the postulates of the financing constraints theory, working capital investments are found to be inversely related to the degree of financing constraints, and positively sensitive to operating cash flow fluctuations and availability of external finance. For financially constrained companies, capital expenditures are found to more likely exercise a negative impact on working capital investments. Contributing to the discussion on the nature of business cycles, we document that the negative cash flow shocks are likely to be transmitted to firms’ counterparties through the trade credit channel rather than through the reduction of investment demand. The empirical findings also suggest that financial managers fail to properly account for capital expenditures in short-term liquidity planning, which, under conditions of limited access to imperfect capital markets, may induce the recurrence of costly working capital adjustments.

El Impacto del WACC (Weighted Average Cost of Capital) en la valoración de empresas.

El artículo se desarrolla en función de la importancia que tiene el impacto de los métodos para la valoración de empresas, tratando específicamente del WACC; por sus siglas en inglés: Weighted Average Cost of Capital (Promedio Ponderado del Costo de Capital), se ha planteado como interrogante, ¿Cuál es la importancia del WACC (Weighted Average Cost of Capital) en la valoración de empresas Implementando el tipo de investigación descriptivo y mediante la estructura de su fórmula, se pretende exponer la conexión que tienen los diferentes elementos que lo integran, así como la necesidad de identificar los activos que realmente generan flujos de efectivo, es decir, activos de capital, reconociendo a su vez, la forma como estos activos se financian a través de los pasivos y el patrimonio. Los aspectos que se deben considerar a la hora de valorar una empresa son múltiples, ya que el valor varía de acuerdo a las percepciones o a las razones de los interesados, la información, el sector, el contexto y el método empleado, entre otros. La conclusión principal, es que en todo análisis de inversión de una empresa es indispensable un proceso de valoración, debido a la trasferencia implícita de valor, y a la definición de puntos importantes para su normal funcionamiento y el eficiente desarrollo de su actividad.