Lower Cash Flow Research Articles

Predicting Firm Profits: From Fama-MacBeth to Gradient Boosting

This paper studies the predictability of firm profits using Fama-MacBeth regressions and gradient boosting. Gradient boosting can use more relevant factors and it predicts better. Profits are more predictable at firms that are large, investment grade, low R&D, low market-to-book, low cash flow volatility. Effects on financing decisions, and cross-section of stock returns are studied. During recessions profits are less predictable - particularly non-investment grade firms. Both algorithms produce estimates like those interpreted in the literature as evidence of excessive human optimism during booms and excessive pessimism during recessions.

Monetary policy and corporate investment: A panel-data analysis of transmission mechanisms in contexts of high uncertainty

This paper investigates the impact of monetary policy on firm-level investment in contexts of economic turmoil. Using a panel of US public firms for the period 2000–2019, we show that policy-rate-based transmission mechanisms are undermined when uncertainty spikes. Furthermore, we find evidence of the existence of asymmetries at the firm level. In line with real options theory's predictions, firms with higher levels of investment irreversibility, operational inflexibility, and market power, as well as firms with lower cash flows and who operate in low-innovation sectors tend to be less responsive to changes in monetary policy. The effectiveness of monetary policy thus depends on the ability of monetary authorities to reduce uncertainty via expectations-based monetary tools, whilst targeting those sectors more likely to be affected by monetary-policy shifts.

Cash flow uncertainty, financial constraints and R&D investment

Based on the data from Chinese listed companies of Shanghai and Shenzhen stock markets between 2005 and 2016, we systematically examine the relationship between cash flow uncertainty and R&D investment, and further research the moderating effect of financial constraints on the association between the two. Our empirical results find that R&D investment decisions tend to be more conservative and cautious due to cash flow uncertainty, which is not conducive to innovation efficiency. Firms with higher cash flow uncertainty invest more cautiously in R&D innovation, whereas firms with lower cash flow invest more boldly in R&D innovation. Financial friction may exacerbate the negative impact of cash flow uncertainty on innovation activities. Strategic cash holding can help firms better deal with the risks caused by cash flow uncertainty. In provinces with high marketization, the market competition intensifies, resulting in more significant cash flow uncertainty.

Kidas Model, Cash Flow, and Size Case of Palestine

This paper examines the nature of interaction between Kida’s model, the cash flows (operating, investing, financing) and the size. It covers the period between 2013 and 2014 based on annual financial statement of Palestinian listed companies in Palestine Stock Exchange. In order to test the hypotheses of the study, the researcher used independent samples T-test. The results show that we accept all null hypotheses, so Kida’s model does not distinguish between high and low cash flow (operating, investing, financing) and the size. Other results show that the model is unable sometimes to predict the failure of companies.

Bays International Private Limited: Evolving Through Market Dynamics

Bays International was incorporated in 1996. Over the years it faced numerous challenges including: high employee turnover (particulary saleforce), limited expansion capabilities, low penetration in semi-urban markets, high operating expenses like rentals, increasing duties (on luxury products), low cash-flows, low budgets for advertising and marketing as compared to competitors, less awareness amongst consumers, volatile consumer preferences (especially by millennial), weak brands’ loyalties, counterfeits/fake products, smuggling and infiltration from grey channels, high number of foreign and local chains entering the market, price war especially with local chains, and uncertain political situation. Four interviews were conducted from management and two interviews from ex employees. Moreover, a lot of open access documents of the company were reviewed. Pertinent literature reveiew also revealed interesting insights about emerging consumer trends and cosmetic industry along with interviews of some marketing directors of leading global brands. The Bays leadership believes that key parameters are improving over time. The case covers how the company maneuvered itself since its inception and launched numerous other brands targeted towards different segments of the society, in order to steer towards growth in changing internal and external environment. The case is based on a scenario when there is yet another increase of taxes by the government in 2019 and presents troublesome situations to branding cum marketing strategy for the company to consider.

Dynamic Investment, Debt Structure and Debt Overhang

We study the impact of the optimal debt and priority structure on corporate financing and investment decisions in a dynamic trade-off model, where a firm simultaneously issues bank and market debt. Private bank debt is renegotiable during financial distress; thus it avoids inefficient and costly bankruptcy losses. Our model shows that the debt priority structure between bank and market debt has significant implications on ex post corporate policies, market leverage and firm valuation. Bank debt substitutes market debt in most cases except when firms face a low tax rate environment. Further, firms with stronger bargaining power, more valuable growth opportunities, or higher renegotiation frictions, facing lower cash flow risks, larger bankruptcy costs, or operating in a higher tax rate environment tend to rely more on market debt. We also demonstrate that the issuance of bank debt along with market debt mitigates the ex post debt overhang compared to the exclusive market debt structure, the effect of which is much stronger when the firm faces less renegotiation friction, lower bankruptcy costs, or higher corporate tax rate. These model predictions reconcile several empirical findings and generate a rich set of novel empirical tests.

Downside Variance Premium, Firm Fundamentals, and Expected Corporate Bond Returns

We find a positive relationship between individual downside variance premia, the difference between risk-neutral and physical expected downside variances, and future corporate bond returns. The hedge portfolio earns the economically substantial and statistically significant excess return of 0.35% (0.39%) per month in value (equal)-weighted returns. The predictive power of downside variance premium is stronger in non-investment-grade (long-maturity) corporate bonds than in investment-grade (short-maturity) ones. We show that downside variance premium positively relates to the likelihood of future default and cash flow uncertainty and negatively relates to future cash flow. When rational investors anticipate a high likelihood of future default, high cash flow uncertainty, or low future cash flow, the current bond price has to decline, resulting in higher future bond returns.

Influence of Director Expertise on Capital Structure and Cash Holdings in High-Tech Firms

Many “High-Tech” firms enjoy high market valuations despite negative earnings and low cash flows due in part to what many see as future bountiful earnings and cash flows, which is a cause for concern. How can corporate governance help? Do well-informed boards assist corporate success through better governance through their influence on financial policy: Capital Structure and Cash Holdings? We test these effects in “High-Tech firms” by segmenting firms into four levels based on technology intensity. We examine differences in board composition and the resultant influence on capital structure. Our fourteen-year sample period includes post-dotcom bubble years and post-Sarbanes-Oxley, which mandated the inclusion of financial experts on corporate boards. We defined two types of firm designated well-informed boards as a result of this analysis. We contribute to the literature in many ways. Using regression analysis and graph theory techniques, we found the educational makeup of high-tech firms to be significantly different from low-tech firms and that they approached capital structure with caution. Low-tech firms rely on board member network connectivity and agency theory's explicative powers.

An Endogenous Approach to the Cyclicality of R&D Investment under Credit Constraints: Firms’ Cash Flow Matters!

This paper examines the sensitivity of firms’ R&D expenditures to being externally financial constrained to undertake innovation projects, considering that being constrained is endogenous. It focuses on devising a model that enable us to explore the combined impact of liquidity constraints, demand shocks, and credit cycle on the cyclically of R&D, controlling by the firms characteristics. The methodology proposed consists of jointly estimating three interrelated equations with mixed distributions of dependent variables. The results obtained complete and improve those of the previous research. It is found that the effect of the business cycle on the perception of external financial constraints is subject to the availability of internal funds in each firm. On the other hand, constrained firms expend in R&D halve of the unconstrained ones, and the sensitivity of firms’ R&D expending to GDP is countercyclical in firms with low cash flows and procyclical in firms with high cash flows. The R&D expending of firms is negatively associated with the aggregate leverage ratio of the non-financial sector. These results mean that business decisions, in particular R&D expending decisions, and macroeconomic variables are strongly related. A better understanding of these interrelations should help in designing macroeconomic policies aimed at stabilizing the economy and reduce growth volatility.

Valuation Beyond CAPM: How to Calculate With Earnings Risk and Insolvency

A cash flow’s value depends on its (1) expected amount, (2) risk and (3) time of occurrence. This applies especially to uncertain payments that are generated by a company for its stake-holders. However, a cash flow’s risk is not adequately considered when it comes to valuation by the traditional DCF method. This is owed to the fact that historical stock return fluctuations, rather than the risk of cash flows, are the subject of the beta factor in Capital Asset Pricing Models (CAPM). To summarise the dark, likely-to-be-hidden secret of corporate valuation practice (see also Damodaran, 2018): a company’s true opportunities and threats (risks) are currently ignored. The failure to explicitly consider, or ‘typify’, threats and opportunities (see Henselmann, 2006, pp. 144ff., Berger and Gleisner, 2018 and Gleisner 2019e) can lead to the undervaluation of a company which, in fact, has (1) good opportunities, (2) low cashflow volatility and (3) a very good rating. This working paper clarifies the significance and effects of earnings risk, in general, and of insolvency risk, more precisely.

E&P Notes (April 2020)

E&P Notes Historic Oil Glut May Linger for Years Stephen Rassenfoss, JPT Emerging Technology Editor Editor’s Note: The global repercussions of COVID-19 and the oil price drop in mid-March continue to have far-reaching effects on the market, operators, and services companies. This month, JPT editors deliver in-depth E&P market and activity updates. To stay updated, visit the JPT website (www.spe.org/jpt), and sign up to receive JPT’s weekly newsletter (http://go.spe.org/jpt_newsletter) and JPT’s monthly Unconventional Insights newsletter ("http://go.spe.org/JPT_Unconventionals_Newsletter)"http://go.spe.org/JPT_Unconventionals_Newsletter). Price crashes caused by supply gluts have been happening since oil production began, but the latest one is growing to epic proportions. “There has been a dizzying drop in world oil demand and a dramatic pivot in Saudi oil production policy. If this situation persists amidst a recession, it points to the possible buildup of the most extreme global oil supply surplus ever recorded,” said Jim Burkhard, vice president and head of oil markets for IHS Markit. The firm’s estimates of overproduction could range from 4 million B/D to 10 million B/D from February to May 2020, which is in line with a trend of growing oversupply estimates from oil industry observers, who say low prices will be long-lasting. E&P Spending Cuts Spur Requests for Reduced OFS Fees Judy Feder, Technology Editor Fallout for the oil and gas industry from COVID-19 and the production volume war that began when Russia walked away from the suggested OPEC+ deal and Saudi Arabia started flooding the market with oil has been rapid and severe. And, it looks as if US shale will be the hardest hit. The total capital and operational expenditure of exploration and production (E&P) companies is now likely to be cut by $100 billion in 2020 and another $150 billion in 2021 if oil prices remain at a $30 level, according to a recent Rystad Energy impact analysis. The shale industry would carry the biggest burden of this supply shock by taking as much as $65 billion of the $100-billion 2020 spending reduction expected globally. And, it may get worse. According to Rystad, if no agreement is reached during the next scheduled OPEC+ meeting in June, E&P companies are likely to slash capital and operational budgets to make up for significantly lower cash flows that are expected this year and next.

The sensitivity of cash flows to cash holdings: case studies at Vietnamese enterprises

Cash management plays an important role in the business operations. However, holding too much cash results in unnecessary expenses such as opportunity costs, management costs, and representation costs due to negative cash holdings. This study examines the sensitivity of cash flows to cash holdings. The paper uses regression methods for table data, including FEM, REM, GLS, and GMM regression, with a research dataset including non-financial companies listed on Vietnam’s stock market in the period 2008–2018. Empirical results show that cash flows are positively associated with cash holdings levels. At the same time, research has shown an asymmetry in cash flows sensitivity to cash holdings. The study also classified the companies with limited and no financial restrictions. In the Vietnamese context, compared to unrestricted companies, financially restricted companies have a lower cash flows sensitivity. The research results are the basis for enterprises to manage cash better and increase business efficiency in the future.

Influence of Overconfidence and Cash Flow on Investment in Vietnam

CEOs Overconfidence can bring potentially risky early decisions to businesses, along with large enterprise free cash flow that can bring different investment decisions with CEOs Overconfidence. Especially in the context of Vietnamese enterprises, CEOs are often influenced by behavioral psychology about overconfidence in investment decisions (due to individual cultural characteristics as well as operating financial markets also depend on many factors outside the market). Therefore, the authors study the impact of overconfidence and cash flow on investment in Vietnamese to find the internal relationship between these three factors in the financial environment in Vietnam. With 480 companies listed on the Vietnam Stock Exchange from 2014 to 2018 (companies have continuous reports), the regression analysis results with panel data (FEM, GLS models, correction of robust and GMM dealing with endogenous problems) have shown Overconfidence has a positive impact on investment. At the same time, the results also indicated that enterprises with overconfident CEOs and large cash flows tend to invest less than enterprises with low cash flow. The results of this study have shown the behavioral behavior of CEOs in Vietnamese enterprises that exist under both prospect theory and effective market theory.

How does economic policy uncertainty affect corporate Innovation?–Evidence from China listed companies

This paper examines the effects of economic policy uncertainty (EPU) on corporate innovation in China from 2000 to 2017. The monthly EPU index for China, developed by Huang et al. (2019), is applied as the measurement of EPU. We find that EPU is positively correlated with corporate innovation in general. We further conclude that in the low EPU period before 2008, EPU induced more innovation activity, but it decreased corporate innovation in the higher EPU period after 2008. Moreover, EPU has a stronger positive effect on state-owned enterprises, lower cash flow companies and companies with fewer financial constraints. This shows that EPU affects corporate innovation mainly through cash holdings and revenue growth rate. Finally, we use different corporate innovation indicators, the US EPU index and a different estimation method for endogeneity and robustness checks. Our results shed light on the relationship between economic policy environment and corporate innovation in China as an emerging economy.

Asset Level Heterogeneity, Competition and Export Incentives: The Role of Credit Rationing

Firm heterogeneity is mostly discussed in the literature from the viewpoint of productivity differential. In contrast this paper recognizes wealth heterogeneity as an important factor that results in firm heterogeneity. The issue of wealth heterogeneity and export incentive through credit market imperfection over the life cycle of a firm remains largely unaddressed in the literature. This paper studies the dynamics of wealth heterogeneity and export incentive of credit rationed firms through asset building. The theoretical and empirical results indicate that an increase in the initial level of competition implies greater export incentive. However, over the life cycle of a firm, the role of competition is impacted by the intensity of capital accumulation and the initial level of wealth. Greater local competition before the entry of firms in the export market hurts export incentive by limiting cash flows and asset build up. Thus low profits due to competition allows firms to look for export opportunities but lower cash flows hurt such incentives.

When is the Price of Dispersion Risk Positive?

We provide robust evidence that the price of analysts' dispersion risk in the cross-section of stock returns changes sign over time, and in particular, turns positive (negative) in periods of high (low) analysts' dispersion. Our result holds for a set of portfolios that are double-sorted on their betas and their coefficients on aggregate dispersion, as well as 36 different sets of test portfolios created by Kenneth French. We construct a general equilibrium model in which analysts of different types have heterogeneous beliefs about aggregate earnings growth. The consumer does not trust either analyst fully, and dynamically adjusts the weight given to each analyst, given the history of their past forecast performance. In equilibrium, each asset's risk premium depends on its exposure to three factors: (i) the market portfolio, (ii) the macroeconomic factor, and, (iii) a ``flight-to-safety'' factor. The first term decreases with dispersion, while the third term increases. These changes occurs because investors shift into assets with lower cash flow betas during periods of high dispersion. We find strong support for such a flight-to-safety in the data.

Unlimited FDIC Insurance and the Implications for Corporate Cash

This paper examines the cash management practices of firms during the period of increased FDIC insurance on noninterest-bearing accounts. While the Transaction Account Guarantee Program and Dodd–Frank Act were intended to help banks by preventing deposit withdrawals, they also seem to have contributed to a change in cash management practices given that cash increased at public firms during this time as well. In addition, the increase seems to be driven by financially unconstrained firms, firms not at risk of default, firms with an investment grade bond rating, and firms with low cash flow variation. An analysis of aggregate data shows that a similar increase was not observed for private firms.

Trademark Protection and Bank Loan Contracting: The Evidence from the 1996 Federal Trademark Dilution Act

We construct a comprehensive database of public firms’ bank loans and trademarks to examine the role of brand names in bank financing; in particularly, we use the 1996 Federal Trademark Dilution Act (FTDA) that enhanced protection of famous trademarks as our identification strategy for a causal inference. A difference-in-differences analysis suggests that firms with more famous trademarks not only pay significantly lower interest rates, but also use more trademark collateral after the FTDA. Moreover, firms with more famous trademarks reveal lower cash flow volatility and higher profitability after the FTDA. Our empirical evidence indicates that banks indeed account for enhanced brand value in their lending decisions.

Sectoral Analysis of Factors Influencing Dividend Policy: Case of an Emerging Financial Market

This study aims to determine whether a firm’s dividends are influenced by the sector to which it belongs. This paper also examines the explanatory factors for dividends across individual sectors in India. This longitudinal study uses balanced data consisting of companies listed on the National Stock Exchange (NSE) of India for 12 years—from 2006 to 2017. Pooled ordinary least squares (POLSs) and fixed effects panel models are used in our estimation. We find that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy. Furthermore, business risk and debt reveal a significantly negative relation with dividends. The findings on profitability support the free cash flow hypothesis for India. However, we also found that Indian companies prefer to follow a stable dividend policy. As a result of this, even firms with higher growth opportunities and lower cash flows continue to pay dividends. We also find evidence that dividend policies vary significantly across industrial sectors in India. The results of this study can be used by financial managers and policymakers in order to make appropriate dividend decisions. They can also help investors make portfolio selection decisions based on sectoral dividend paying behavior.

'How Does Web Personalization Create Value? Lower Cash Flow Volatility or Enhanced Cash Flows'

This study examines the performance consequences of web personalization (WP), a type of personalization in which web content is personalized and recommendations are offered based on customer preferences. Despite the growing popularity of personalization, there is a dearth of research at the firm level on whether and how web personalization creates shareholder value. We develop and test a conceptual model that proposes that the impact of WP on shareholder value is mediated by 1) cash flow volatility and 2) premium price. The hypotheses are tested based on 603 firm-quarter observations spanning 80 firms over six years in the online financial services industry. The results suggest that while WP lowers the volatility of cash flows, it only enables firms to charge premium prices when online trust is high. Additional tests reveal that the reduction in cash flow volatility is because of lower churn as opposed to acquiring new customers or greater cross-buying. Finally, online trust positively moderates the relationship between WP and cash flow volatility and price premia. Practical implications of the findings are discussed.