Level Of Cash Flow Research Articles

Implementing Real Options Valuation under Macroeconomic Risk and Normally Distributed Cash Flows

The paper highlights the encountered problems in implementing real options under more realistic assumptions such as business cycle risk and normally distributed cash flows. The problems considered include (i) estimating empirical distribution of cash flows from real option investments; (ii) investment decisions across business cycles, and (iii) calculating the probability of investing with the above stated rich features. To this end, we estimate operating cash flows of US corporate firms using a Markov chain model under both geometric and arithmetic Brownian motions assumptions for cash flows and develop a valuation model of real option with normally distributed cash flows. Associated investment valuation models incorporating these estimates reveal that critical cash flow levels significantly differ across models and regimes.

Valuation of cyclical assets and exit value

PurposeOrdinary direct capitalization is normally considered procyclical in its present form (De Lisle Grissom, 2011); for this reason, an alternative approach to direct capitalization may be useful in the determination of a robust opinion of value. The valuation standards propose an alternative determination of terminal value in the discounted cash flow analysis, recommending that for cyclical assets, the terminal value should consider … “the cyclical nature of the asset and should not be performed in a way that assumes “peak” or “trough” levels of cash flows in perpetuity” (IVS 105 Valuation Approaches and Methods para 50.21 lett e).Design/methodology/approachThe introduction in International Valuation Standards (IVS) of Cyclical Assets raises several questions for the community of real estate professionals and academicians (IVS, 2022, 105 Valuation Approaches and Methods para 50.09 lett d). Cyclical assets can be defined as property whose value is “influenced by upturn and downturn of the market in a significant way” (d’Amato et al., 2019).FindingsThe paper proposes different solutions to the problem. The determination of the exit value using cyclical capitalization allows for a prudent assessment of the value and may be used either as a valuation procedure or a risk analysis method.Research limitations/implicationsThe valuation comparison with the traditional valuation techniques will be based on an iteration of exit value in order to determine the effects of the valuation procedure on the opinion of value.Practical implicationsThe implication of the valuation procedure is the introduction of a countercyclical valuation method to determine the exit value in order to reach stable and reliable valuations for income-producing properties.Social implicationsThese models may have a social implication, providing valuation for income-producing properties that may deal with the property market cycle in a more efficient way, providing efficient valuation for banks and institutions.Originality/valueThe paper is the first application of such a valuation procedure to the determination of exit value.

Deteksi Kesehatan Keuangan Industri Department Store Selama Periode 2020 – 2022 Menggunakan Financial Discriminant Models Altman Z-Score

This study aims to determine the condition of the company's financial health during the 2020-2022 period. The sampling technique used is purposive sampling. This research was conducted on department store companies. The data used in this study is secondary data obtained from the websites of each company. This research tries to find the factors causing the decline in the company's liquidity level through the company's financial report data during the 2020-2022 period, based on the research conducted several factors were found to be the phenomenon of a decrease in the level of sales that occurred due to the impact of social restrictions large-scale so that it affects the company's sales level and disruption of the company's cash flow. From the results of the research conducted, the authors hypothesize several solutions that other similar companies can use in dealing with the impact of the crisis, some example is to create new market options that utilize technology such as increasing market networks and dividing the ratio of direct sales and indirect sales. Research results and theoretical implications obtained by the authors are expected to be used for the next 2-3 years after the crisis ends.

DETERMINASI PERSISTENSI LABA: Peran Volatilitas Penjualan, Arus Kas Operasi, dan Tingkat Hutang pada Sektor Properti dan Real Estate di Indonesia

Profit persistence can be interpreted as the possibility that a company's profit level will repeat itself in the future. This study aims to determine the effect of sales volatility (X1), operating cash flow (X2) and debt levels (X3) on profit persistence (Y) in Properties and Real Estate companies listed on the Indonesia Stock Exchange for the 2017-2021 period. Sampling in this study used a purposive sampling technique and obtained 13 sample companies. The data analysis method used is quantitative data analysis, namely using panel data regression analysis and using the EViews 12 tool. The results of this study indicate that partially operating cash flow has an effect on earnings persistence. Meanwhile, sales volatility and debt levels partially have no effect on earnings persistence. Meanwhile, simultaneously sales volatility, operating cash flow and debt levels affect earnings persistence with an R2 contribution of 21.35%.

When acquirers are short on cash flow in M&A deals

Studies on corporate takeovers are voluminous but typically assume that acquirers are not financially constrained. We show that acquirers' free cash flow (FCF) levels have significant impacts on their takeover activities and consequences. Acquirers with low FCF, despite their high levels of cash holdings, tend to pay in stocks rather than cash. The targets acquired by low-FCF acquirers are of inferior quality relative to those obtained by high-FCF acquirers. After acquisition, low-FCF acquirers seriously underperform their peers, but this underperformance does not exist in high-FCF acquirers. Further, the financial leverage of low-FCF acquirers increases sharply following acquisitions, and a significant number of them become bankrupt or are acquired by other firms. Our evidence suggests the importance of acquirer's financial position to sustain the normal operation of the combined entity following the deals. Firms with financial constraints, therefore, should be conservative in advancing takeovers.

THE IMPACT OF EVENTS AFTER THE REPORTING DATE ON THE FINANCIAL POSITION AND PERFORMANCE OF BANKS

Banks maintain their accounting records and prepare financial statements in accordance with IFRS. Annual financial statements are a set of reports that characterize the financial position, results of the bank’s operations, cash flows and changes in equity for the year. It is interesting to note that the end of the reporting period is only the beginning of the stage of preparation and disclosure of financial statements. After all, in addition to the reporting date and the date of disclosure of the annual financial statements, which are known to the general public, there is a whole list of dates that are known only to managers, accountants and auditors. These are the date of completion of preparation, the date of submission to the Board of Directors, the date of partial disclosure of certain indicators, such as profit, the date of approval of the financial statements by shareholders, etc. As a rule, the reporting date is December 31 of the respective year, although it may be different in accordance with IFRS. Accordingly, the date of publication of the annual financial statements is April 30 of the year following the reporting year. At the same time, a certain period of time elapses between the reporting date and the date of approval of the financial statements. The Bank’s operations are ongoing, and therefore, there is a high probability that new events and circumstances may arise. IFRSs recommend disclosing information about events that occur between the reporting date and the date the financial statements are authorized for issue or the date the financial results or selective information is available. Such recommendations should not be ignored, as this may indicate the concealment of important information or even be classified as fraud. Events after the reporting period are any events, which may be positive or negative, favorable or unfavorable, that occur from the end of the reporting period until the financial statements are authorized for issue. The classification of these events depends on the date of their probable occurrence and, accordingly, their impact on the financial statements. In general, these are events that affect the financial statements and require adjustments or events that do not require adjustments. It is worth paying attention to events after the reporting period that may affect the going concern basis. IFRS prohibit banks from preparing financial statements on a going concern basis if events after the reporting period indicate that such an assumption is inappropriate. The decision to use the going concern basis is based on a checklist of going concern triggers and their detailed analysis. The checklist of triggers includes: economic and geopolitical situation; level of income and cash flows of the bank; liquidity and solvency of the bank, as well as current and future profitability; financial position of counterparties; external and internal factors affecting the work of employees. For the financial statements prepared for the year ending December 31, 2021, the war and its consequences are events that do not require adjustment, as they reflect conditions that arose after the reporting period. For example, the company’s assets were damaged as a result of hostilities between the end of the reporting period and the authorization of the financial statements for issue. In accordance with IFRS, any impairment losses will be recognized in the period in which they occur. Accordingly, information on significant losses from asset damage will not adjust the 2021 financial data, but should be disclosed in the notes to the financial statements. The study analyzed the notes to the annual financial statements of banks for 2019-2022.

Impact of Capital Structure on the Operating Performance of Listed Companies in the Pharmaceutical Industry

The objective of this paper is to explore the correlation between the capital structure and op-erating performance of selected leading pharmaceutical companies listed on the stock ex-change during the COVID-19 pandemic. To investigate how diverse capital structures influ-ence corporate performance, this study collects, calculates, and compares pertinent financial data, including leverage ratios, performance indicators, and cash flow, for these firms over three years. The findings show that companies with lower debt ratios are more likely to achieve stable earnings and cash flows, as well as to achieve higher performance indicators to some extent, compared to companies with higher debt ratios. Thus, capital structure has an impact on a company's operating performance. At the same time, a reasonable capital structure optimization can enhance a company's operating performance and mitigate opera-tional risks. It is recommended that listed companies in the pharmaceutical industry should focus on optimizing their capital structure to reduce financial risks and financing costs and to improve cash flow levels in order to achieve stable improvements in operating perfor-mance while ensuring sound operations and management. Investors should also focus on the capital structure of companies when making investment decisions and select those compa-nies with a sound capital structure for investment. These findings and recommendations provide suggestions and directions for the pharmaceutical industry to optimize its capital structure and improve its operating performance.

The role of real earnings management in the value relevance of accounting information in Indonesia

Purpose- One feature that should be integrated in financial statements to be relevant to decision-makers is the relevance of the information to the users. When the value and usefulness of accounting information used to gauge business financial performance are undermined by earnings management methods, problems arise. As a result, the information presented may deceive financial statement users about the corporation's financial performance. Because IFRS demands managerial judgment in the accounting process by definition, its adoption may even increase the chance for real earnings management (REM). This study aims to examine the impact of REM to the value relevance of accounting information before and after IFRS adoption. Methodology- The population was manufacturing companies listed on the IDX, with samples 230 firm year observations consists of one hundred fifteen firms year before adoption of IFRS and one hundred fifteen firms year after IFRS adoption. this study used firms’ abnormal levels of cash flows, production costs, and discretionary expenditures as proxies for real earnings management. Using a price model and panel data, the main result confirms that real-based earnings management has an impact on the value relevance of earnings and book value of equity before IFRS adoption, but has no effect after IFRS adoption. Findings- The findings revealed that prior to the adoption of IFRS, real earnings management was employed by companies that had higher earnings value relevance and lower equity book value relevance than companies that did not apply earnings management. After the adoption of IFRS, there is no significant effect of real earnings management on the value relevance of earnings and equity book value. Conclusion- The results show that investors believe that earnings are a signal from managers with the implementation of real earnings management prior to the adoption of IFRS, but after the adoption IFRS, they may not be able to do so. Keywords: Real earnings management, value relevance, accounting information, earnings, equity book value, JEL Codes: M40, M41, M49

The moderating role of CEO overconfidence on debt maturity decisions: evidence from the MENA region

Purpose This study aims to analyze how cultural variations impact the relationship between long-term debt use and managerial overconfidence. Investigate into how the relationship between growth prospects and the utilization of long-term debt is moderated by managerial overconfidence. In addition, the research explores the moderating effect of managerial overconfidence on cash flow levels. Design/methodology/approach The study used long-term debt as the dependent variable and used generalized method of moments–instrumental variables regression analysis to examine data from 356 firms across 11 Middle East and North Africa (MENA) countries and 5 industries between 2013 and 2021. Findings CEO overconfidence moderately boosts the link between long-term debt maturity and growth potential, particularly for firms with limited internal funding. Cultural factors, such as masculinity and uncertainty avoidance, play a significant role in moderating the relationship between managerial overconfidence and debt maturity choices. Practical implications To understand the impact of managerial overconfidence on a company’s debt maturity decision, it is essential for boards and shareholders to consider and monitor the CEO’s behavioral traits, particularly for growing companies. Regulators and policymakers must also be wary of the risk of internal control weakening due to overconfident managers, especially in MENA markets. Originality/value The authors’ contribution to the literature lies in exploring how managerial overconfidence moderates the agency conflict between shareholders and debtholders in MENA region firms, which has received minimal attention in previous studies. This study expands the knowledge of the impact of managerial overconfidence on emerging economies and provides evidence that national culture plays a vital role in determining debt financing decisions.

Earnings persistence determinants in Indonesia’s consumer goods companies

This study aims to investigate the effect of various financial factors that affect the consumer product sectors in the Indonesia Stock Exchange earnings persistence. The study employed purposive sampling, the data were collected from the 2011-2020 annual financial statements, and analyzed by utilizing panel data regression. In the consumer cyclical industry, firm size and accrual amount negatively influence earnings persistence. In contrast, the impact of fluctuating cash flow, volatile sales, and debt levels was negligible. In the non-cyclical consumer sector, cash flow volatility positively influenced earnings persistence. However, debt levels and accrual amounts had a negative influence, while sales volatility and firm size had no effect. These findings suggest that the determinants of earnings persistence vary by industry and that different financial factors may affect earnings persistence differently. The results may help Indonesian stakeholders in comprehending the factors that affect the sustainability of revenues in the consumer products industry.

Cash Flow, Firm Size, and Earnings Persistence: Debt as Moderator

This quantitative study aims to examine the impact of operating cash flow on earnings persistence, considering debt level as a moderating variable. Additionally, the study investigates the influence of firm size on earnings persistence, also with debt level as a moderating variable. The research employs Moderated Regression Analysis (MRA) using SPSS software. Classical assumption tests, including normality, multicollinearity, autocorrelation, and heteroscedasticity tests, are conducted prior to MRA. The findings align with previous research, indicating that debt level does not moderate the relationship between firm size and firm value. These results contribute to the understanding of the dynamics between operating cash flow, firm size, earnings persistence, and debt level, providing insights for financial decision-makers in managing and interpreting financial performance indicators.
 Highlights:
 
 This quantitative study examines the influence of operating cash flow on earnings persistence, with debt level as a moderating variable.
 It also investigates the impact of firm size on earnings persistence, with debt level as a moderating variable.
 The research utilizes Moderated Regression Analysis (MRA) and conducts classical assumption tests to validate the findings. The results reveal that debt level does not moderate the relationship between firm size and firm value, contributing to the understanding of financial dynamics in organizations.
 
 Keywords: Operating cash flow, Earnings persistence, Debt level, Firm size, Moderating variable.

Conceptual Approaches to the Development of a Cash Flow Classifier

Cash flows are a convenient source of operational information for analyzing the state of the economy. Obtaining this information will ensure the use of operational regulatory tools to achieve the goals of economic security. The purpose of the study is to conceptualize the problem of creating a domestic classifier of cash flows, which acts as an early identification tool for crisis phenomena in the economy. The authors systematize foreign and domestic approaches to the creation of a classifier of cash flows, the organization of monitoring of the volatility of cash flows. The article reveals the differences between the classifier of payments and cash flows, identifies the key limitations associated with the creation of the classifier. There are three levels of cash flows: individual, group and territorial. These levels can form the basis of the created cash flow classifier. The authority to monitor cash flows should be assigned to the Bank of Russia. Considering the prospects of expanding the capabilities of the Bank of Russia's payment system and the introduction of the digital ruble, the Bank of Russia can collect and promptly analyze information about cash flows. The object of monitoring is the level of volatility of cash flows. Subsequently, the information received can be automatically transmitted to the relevant authority for the use of state regulation tools.

A semi-parametric analysis of the cash flow sensitivity of cash

Using a semi-parametric approach that allows for a flexible functional form and a large firm-level international dataset, we re-examine the contentious issue of whether the cash flow sensitivity of cash is positive or negative. Our findings suggest that the cash flow sensitivity of cash is negative at lower levels of cash flow and positive at higher levels, which could explain the mixed results in the literature. Additionally, we find that the cash flow sensitivity of cash varies based on different levels of cash flow, across time, and among developing and developed countries for estimates based on non-parametric methods. Our findings contradict those based on parametric methods that assume a linear functional form and suggest no significant asymmetries in the cash flow sensitivity of cash.

Working Capital Efficiency and Earning Management in Jordan

Industrial companies suffer from financial crises and challenges caused by mismanagement of working capital. The inability of industrial companies to provide an appropriate level of cash flow to cover their expenses and pay their financial obligations may negatively affect their existence and continuity. However, this paper aims to provide some literature to examine the mediating role of sales growth and the debt ratio between working capital efficiency and profit management in Jordan. A relationship is found between working capital management and earnings management. Furthermore, the etiquette related to working capital and earnings management was reviewed. It is hoped that the results of this study will help researchers in their future studies to research this topic from various aspects to develop and develop knowledge. In other words, the importance of this study lies in its attempt to make modest contributions to the library of Arab and foreign sciences using a scientific method capable of achieving the objectives of the study, as it helps researchers and those interested in corporate governance and profit management.

The effect of life cycle stages on capital expenditures: evidence from an emerging market

PurposeThe purpose of the article is to examine the effect of life cycle stages on capital expenditures, using Borsa Istanbul-listed companies.Design/methodology/approachThe panel data estimation procedure was used as the primary method to test the hypothesis. The authors used four additional analyses to check the robustness of the results. The model was tested for endogeneity using the generalized method of moments (GMM) estimation. Quantile regression was utilized for the non-parametric test of the model. In the third robustness test, the sample was divided into two using financial constraints with the Size-Age (SA) Index proposed by Hadlock and Pierce (2010). The last analysis removed the global financial crisis (GFC) years from the sample.FindingsBorsa Istanbul-listed companies tend to invest less as they move forward in their life cycle stages. The results show that market capitalization, operating cash flow levels and leverage positively affect capital expenditure investments. The empirical evidence also revealed that cash holding levels have a negative effect on capital expenditure decisions. Robustness tests support the results.Practical implications The findings are potentially useful for investors and managers. Having the information that decreasing capital expenditures signals that the company is in the last stages of its life would be a sign for managers to improve their investment strategies to avoid getting out of business and survive. They need to find options and solutions to propel their companies back on a path of growth. Additionally, the same information could be vital for investors' investment decisions.Originality/valueThis paper contributes to the literature by providing evidence about the effect of life cycle stages on capital expenditures from an emerging market. To the best of the authors’ knowledge, it is the first paper to investigate empirically how moving forward in the life cycle stages affects capital expenditures in an emerging market.

Corporate Social Responsibility Rating, Corporate Governance, and Financial Distress: Evidence from China

AbstractThis study investigates the relationship between corporate social responsibility (CSR) and financial distress in China using theO‐score and a Chinese sample of 4202 observations between 2011 and 2017. The relationship is accordingly more pronounced in weak corporate governance firms with low levels of institutional shareholders and free cash flow and among non‐state‐owned enterprises and mandatory CSR disclosure firms. The findings are robust to endogeneity through robustness checks and the 2013 Sichuan Lushan earthquake as an exogenous shock to CSR. Ultimately, the study will help investors, shareholders, and policymakers appreciate the impact of CSR dimensions.

An analysis of the positive effect of real earnings management on financial performance

PurposeREM models infer abnormal levels of cashflow from operations (AbCFO), selling, general and admin (AbSGA) and production expenses (AbProd) are opportunistic, based on the supposition that engaging in real activities to meet current earnings targets (t) will negatively influence future performance (t+1). However, from a firm productivity perspective, cost reduction (via AbCFO, AbProd and AbSGA) is interpreted as an efficiency enhancing business strategy. This study therefore differentiates between (1) firms with ineffective management that have engaged in AbCFO, AbProd and AbSGA to achieve an optimal resource-cost mix to generate sales (REMF) and (2) firms with effective management that have not (OEF).Design/methodology/approachUsing a sample of Korean listed firms over the 2000–2016 sample period, the study utilizes data envelopment analysis to capture the capability of management to generate sales from resources that are directly under their control. The study then compares the incremental effect that managerial decision making can have on real earnings management (REM) and future firm performance (period t+1 to t+5).FindingsThe study makes two important contributions. First, consistent with the efficiency/productivity literature, but contrary to seminal REM studies, empirical results shows that AbCFO, AbProd and AbSGA improve firm performance in period t and t+1 (to t+5), demonstrating “REM” is not opportunistic by default. Second, OEF have higher financial performance compared to REMF, in periods t and t+1.Originality/valueThe study therefore invokes resource-based theory and data envelopment analysis to integrate managerial effectiveness (human capital) into REM modelling. The study therefore extends the basic REM residual model.

Managerial Incentives and the Valuation of International Joint Venture Formation

Strategic management decisions and actions involving international joint venture formations are significant to many firms and have major economic consequences. Previous empirical evidence on the effects of joint venture formation announcements on shareholder wealth reveals that firm value is more often positively impacted. However, many previous analyses of shareholder wealth from joint venture formations do not fully explore cross-sectional differences in managerial incentives to pursue these international investments. The primary purpose of this study is to exploit these cross-sectional differences using agency theory to explain managerial behavior and subsequent shareholder effects. This study capitalizes on agency theory’s notion that managers are not necessarily motivated solely by the maximization of firm value, but instead are interested in maximizing their own utility. The study’s findings are consistent with agency theoretic hypotheses based on a broad cross-section of international joint ventures. Results demonstrate that shareholder returns to international joint venture formation exhibit considerable variability and, importantly, are at least partially explained by cross-sectional differences in agency incentives. Specifically, returns to shareholders are positively related to the level of managerial ownership and inversely related to the level of free cash flow. Moreover, a positive relation is found between shareholder returns and the joint interaction between leverage and free cash flow. These findings indicate that the effect of international joint venture formation on shareholder value is not uniform and, more importantly is at least partly influenced by managers’ agency incentives.

Impact of Dividend Payment on Firms’ Leverage: Moderating Role of Firm Size

This article investigates the impact of firms’ dividend payment decision on its capital structure. It also examines whether firm size moderates the relationship between dividend decision and capital structure. It relies on a large dataset of 4,116 listed firms over the period 2002–2019 in the Indian scenario comprising 37.21% firm-year observations as dividend payers and 62.79% firm-year observations as dividend non-payers. Fixed effect regression is used for analysis based on the results of the Hausman test for model specification. The study observes negative impact of dividend payment on firms’ leverage ratios. Ability of dividend payment to mitigate the free cash flow agency conflict together with the availability of substantial volume of retained earnings to meet the financing requirements internally are found to be possible explanations for lesser demand of debts in case of dividend paying firms. The study also finds heterogeneous impact of dividend payment on leverage ratios for small and large firms, thus confirming the moderating role of firm size. The higher level of free cash flow for dividend payers compared to non-payers in case of small firms is found to be the only possible explanation for such results. Financial managers may refer to the findings of the study as a guide while deciding their financing choices.

Social insurance and earnings management: Too rich to be good.

We examine the relationship between social insurance contributions and earnings management for publicly listed firms in China. Our empirical results show that the social insurance contributions burden significantly reduces the degree of earnings management by reducing the level of free cash flow. Additionally, the negative relation between social insurance contributions burden and earnings management is more pronounced when the internal and external social insurance pressures are high and when the firms are large non-state-owned enterprises. We also discuss the heterogeneity among firms for different financing constraints, external financing environment, regional marketization, and internal and external corporate governance. Finally, we further find that under the dual collecting system, although the social security administration is a better collecting agency, the local tax bureau acting with full responsibility is more effective than the collecting system.