Lower Cash Flow Research Articles

Bank credit to SMEs in Japan: Evidence from normal times, the global financial crisis, and the COVID-19 crisis

We investigate what types of small and medium-sized enterprises (SMEs) use bank loans during crisis periods, focusing on the global financial crisis (GFC) and the economic crisis caused by the coronavirus disease 2019 (COVID-19) pandemic. Using comprehensive data on SMEs in Japan, we obtain the following results. First, during these two crisis periods, SMEs with low cash flow, high credit risk, and low sales growth borrowed more from banks. Second, these firms borrowed more during the COVID-19 crisis than during the GFC. Furthermore, the ex post profitability of these firms was lower during the COVID-19 crisis, which was special in that vulnerable firms borrowed more from banks. Third, the increases in probability of default were not large during the early stages of the COVID-19 crisis, but were economically significant in 2021. These results imply that massive financial support during the COVID-19 crisis delayed firm defaults.

Controlling shareholders, their incentives and corporate governance ratings

PurposeThis study aims to facilitate the development of a better understanding of how controlling shareholders respond to the mandatory system of corporate governance rating (CGR) for all firms listed on Taiwanese stock markets and the incentives of controllers to apply corporate governance best practices.Design/methodology/approachUsing CGR data for all Taiwanese listed firms from 2014 to 2020, this study examines whether controlling shareholders determine a firm’s CGR.FindingsSingle-family-controlled firms have the lowest CGRs, and management-controlled firms have the highest ratings. Blockholder-controlled firms are more likely to have top 20% ratings than single-family-controlled firms and bottom 20% ratings than single-family and management-controlled firms. All three categories of firms have unfavorable (favorable) ratings because of substitute governance effects (signaling effects).Originality/valueManagement-controlled firms, in which agency problems refer to principal-agent conflicts, are more likely to have good ratings than single-family controlled firms, in which agency problems refer to principal-principal conflicts. Blockholder-controlled firms have extreme ratings, suggesting that multiple large shareholders develop corporate governance practices consistent with their best interests to increase firm value or expropriate wealth. Low cash flow rights and high control-ownership divergence lead firms to adopt additional governance arrangement(s) to make shareholders trust firms with capital and signal to shareholders that they can trust them with their capital.

Commercial Real Estate in the Face of Climate Risk: Insights from REITs

While climate risk is recognized as a substantial concern in finance and residential real estate, research examining its effects on commercial real estate markets remains limited. In this study, we contribute to this body of knowledge by constructing a firm-level climate risk measure. Our data, collected from the National Oceanic and Atmospheric Administration’s county-level temperature database and a detailed property-level dataset of U.S. equity REITs from 1995 to 2020, enable us to investigate the effects of climate risk on commercial real estate at the firm level. Our findings suggest that REITs with greater exposure to climate risk - characterized by a higher percentage of properties located in counties experiencing abnormally elevated temperature changes - exhibit lower cash flows and firm values, as well as inferior stock returns. These adverse impacts from climate risk persist across various model specifications and control variables. Our study thus illuminates the economic implications of rising temperatures on commercial real estate from a portfolio perspective and provides empirical support for the temperature-based long-run risk model.

Tournament incentives, credit default swaps trading, and corporate policies: The interplay of managerial and creditor incentives

This paper investigates how the interaction between managerial and creditor incentives affects corporate risk and policies. Using a sample of 16,513 firm-year observations from 2001 to 2014, we find that credit default swaps (CDS) trading leads to higher stock return volatility and leverage, yet lower cash flow volatility and capital expenditure. Meanwhile, tournament incentive is associated with higher firm risk and more aggressive corporate policies. Further, we find that the interaction between tournament incentives and CDS trading alleviates the overall effect of intra-firm tournament incentives and CDS trading on firm risk and corporate policies. Altogether, our results suggest that risk-averse managers balance risk-taking incentives and creditor incentives when making corporate decisions and, hence are less sensitive to tournament incentives due to their concerns about exacting empty creditors problems in CDS-referenced firms. This study contributes to the literature by providing initial insights into the interaction effects between managerial and creditor incentives.

Pricing Multi-Event-Triggered Catastrophe Bonds Based on a Copula–POT Model

The constantly expanding losses caused by frequent natural disasters pose many challenges to the traditional catastrophe insurance market. The purpose of this paper is to develop an innovative and systemic trigger mechanism for pricing catastrophic bonds triggered by multiple events with an extreme dependence structure. Due to the bond’s low cashflow contingencies and the CAT bond’s high return, the multiple-event CAT bond may successfully transfer the catastrophe risk to the huge financial markets to meet the diversification of capital allocations for most potential investors. The designed hybrid trigger mechanism helps reduce the moral hazard and increase the bond’s attractiveness with a lower trigger likelihood, displaying the determinants of the wiped-off coupon and principal by both the magnitude and intensity of the natural disaster events involved. As the trigger indicators resulting from the potential catastrophic disaster might be associated with heavy-tailed margins, nested Archimedean copulas are introduced with marginal distributions modeled by a POT-GP distribution for excess data and common parametric models for moderate risks. To illustrate our theoretical pricing framework, we conduct an empirical analysis of pricing a three-event rainstorm CAT bond based on the resulting losses due to rainstorms in China during 2006–2020. Monte Carlo simulations are carried out to analyze the sensitivity of the rainstorm CAT bond price in trigger attachment levels, maturity date, catastrophe intensity, and numbers of trigger indicators.

Stock liquidity, cash flow sensitivity and the value of cash

Using a sample of U.S. public firms from 1990 to 2017, we find that firms with higher stock liquidity are associated with lower cash flow sensitivity of cash. An analysis of the market value of cash shows that each additional dollar of cash and investment in non-cash assets is worth significantly more in firms with high stock liquidity than in firms with low stock liquidity. Further analysis indicates that firms with high stock liquidity enjoy higher investment efficiency and invest more in capital expenditure and R&D. The reduction in cash flow sensitivity through improved stock liquidity is more pronounced when firms demonstrate lower financial constraint, information asymmetry and risk, and stronger corporate governance (i.e., fewer agency problems). Overall, these results suggest that stock liquidity reduces information asymmetry and the agency costs of free cash flow, thus contributing to value enhancing investments which improves company valuation.

Enterprise system implementation and cash flow volatility

AbstractThis study investigates the financial and operational implications of enterprise systems (ESs) in corporate risk management. Using matched difference‐in‐differences analyses based on ES implementation events, we document a significant reduction in the volatility of operating cash flows following ES implementations. We further show that ES implementers have better post‐implementation operational efficiency than matched non‐ES firms and better manage sales, costs of sales, working capital, and operating expenses to reduce operating cash flow volatility. Consistent with the benefits of lower cash flow volatility documented in prior literature, we find ES implementers demonstrate higher investment efficiency, lower reliance on external financing, and higher debt capacity post‐ES‐implementation than the matched non‐ES firms. Our study sheds light on the economic benefits of utilizing ESs in corporate risk management and in so doing responds to the paucity of empirical research in this area.

How ‘bad’ is renter protection for institutional investment in multifamily housing?

We assess the role of state-level renter protection regulations on the pricing, performance and risk of multifamily housing. We construct a renter protection score (RPS) to measure the extent of renter protection in each state. Using a proprietary property-level dataset from loans backed by commercial mortgage backed securities (CMBS) and census tract socioeconomic variables, we study the role of RPS on initial capitalization (cap) rates, annual net operating income (NOI) and annual loan delinquency rates of multifamily housing. We find that, contrary to conventional wisdom that renter protection is ‘bad’ for investors, multifamily housing in high RPS states is associated higher annual NOI and NOI growth and lower delinquency rates. We also show that better tenant protection is associated with lower initial cap rates. The results point to investors perceiving properties in more regulated states as lower risk due to reduced income volatility. For institutional investors, higher levels of renter protection are, therefore, not ‘bad’ but are instead associated with lower cash flow volatility and better income growth prospects.

Survey on Mortgage-Backed Securities Prepayment Risk Using Machine Learning Models

Mortgages allow for partial or complete prepayment at any time prior to the loan's maturity date. A mortgage prepayment is risky for the lending institution because it eliminates the borrower's obligation to pay future interest and complicates the steps required for refinancing the mortgage loan. Prepayment risk is a threat to mortgage-backed securities (MBS) that arises when borrowers pay down their mortgage principal more quickly than expected. For MBS investors, this means lower cash flows. A negative impact on cash flows and exposure to extension risk could result from actual prepayment rates being higher or lower than expected.

Cash shortfalls in IPO firms

We find that most IPO firms will run out of cash soon if they did not receive proceeds from IPOs. The cash shortfalls are not caused by increases in capital expenditure, R&D, M&A, or debt repayment and persist during the 5 years after IPO. Negative net cash flows help explain the persistent cash shortfalls. These results are consistent with the funding horizon theory. IPO firms with more initial cash shortfalls also have lower cash flows in the next 5 years, suggesting that initial cash shortfalls can be used to predict the future operating performance of IPO firms.

Dividend regulation and cost stickiness: evidence from a quasi-natural experiment

PurposeThis paper aims to examine the effect of dividend regulation on cost stickiness (i.e. the asymmetric change in firm expense between sales increase and sales decrease) and explore the underlying mechanism.Design/methodology/approachBased on the quasi-natural experiment of the Guideline for Dividend Policy of Listed Companies issued by the Shanghai Stock Exchange (SSE) in 2013, the authors employ a difference-in-difference model to investigate the impact of dividend regulation on cost stickiness.FindingsThe authors find that the cost stickiness of treatment group firms has decreased significantly when compared with control group firms after the dividend regulation. Moreover, this effect is more pronounced among firms in lower marketization regions, in lower competition industries and those with less analyst coverage and lower cash flow levels. Further analyses show that dividend regulation reduces the cost stickiness of firms by mitigating agency problems. Finally, the conclusion holds after several robust tests, including controlling for firm fixed effect, propensity score matching (PSM), placebo test and reconstruction of expense variable.Originality/valueThis paper confirms that dividend regulation serves an important role in corporate governance, which reduces firms' agency costs and thereby decreases cost stickiness. The conclusions shed light on the dividend policies of listed companies and capital market regulation in the future.

Financial Reporting Quality and Share Values of the Quoted Non-Financial Firms in Nigeria

The study examined the level of compliance with financial reporting standards of quoted non-financial firms in Nigeria and investigated the impact of financial reporting quality on share values of the quoted non-financial firms in Nigeria. These were with a view to determining the effect of financial reporting quality on the firms’ value of quoted non-financial firms between 2004 and 2021.The study employed secondary data. The population of this study was 176 quoted non-financial firms listed on the Nigeria Stock Exchange. Fifty firms were purposively selected based on the availability of complete financial information for the sampled period. Data on cashflow accrual ratio, statements of financial position accrual ratio as proxies of financial reporting quality, firms’ size, auditors’ type, share values, board size, leverage, audit committee size, age and firms’ liquidity were sourced from the audited annual financial report of the firms and factbook of Nigeria Stock Exchange. Data collected were analysed using percentages fixed effect model, random effect model and pooled OLS method.The results showed that the cashflow accrual ratio as a proxy of financial reporting quality has no significant effect on the value of shares but negative relationship with share values confirmed that lower cashflow accrual ratio is an indication of good financial reporting quality. Also, the result showed that all the independently variables are good predictors of share values with adjusted R-square of 76%. The study concluded that financial reporting quality has a positive impact on the market value of quoted non-financial firms in Nigeria. Keywords: Cashflow Accrual Ratio, Financial Reporting Quality, Balance Sheet Accrual Ratio, Share Values DOI: 10.7176/RJFA/13-14-06 Publication date: August 31 st 2022

With trust we innovate: Evidence from corporate R&D expenditure

We examine the impact of social trust on corporate R&D expenditure. Using a large sample of 1811 Chinese firms during 2007–2018, we show that social trust significantly promotes corporate R&D expenditure. Firms located in higher social trust regions invest 6.16 % (4.17 %) more in R&D1 (R&D2) than those located in lower social trust regions. This result is robust to a battery of robustness checks and endogeneity corrections using the instrumental variable approach, and is more pronounced for non-state owned enterprises (non-SOEs), small firms, firms with low cash flow, firms with weak corporate governance, and firms located in regions with lower marketization index. We further find that, social trust is positively associated with higher innovation output as measured by patents. Overall, we highlight the important role played by social trust in encouraging corporate R&D expenditure and enhancing innovation.

Do Brand-Affiliated Hotels Have Lower Cash-Flow Risk?

Hotels are generally perceived as the riskiest type of commercial real estate (CRE) investment because hotel “leases” have relatively high turnover. Existing literature regarding CRE investment risk and return lacks investigation of hotels at the unit level—which is the level of analysis undertaken by existing and prospective hotel investors. Two major types of hotels are branded and independent ones. The purpose of this study is to investigate the variability (risk) of key performance indicators (KPIs) such as occupancy rate, and revenues and profit of branded versus independent hotels. Using a large sample of performance data regarding over 4,000 U.S. hotel properties from 2000 to 2019, we examine the extent to which branding affects the volatility of KPIs. We find that brand-affiliated hotels have lower cash flow risk measured as lower volatilities of KPIs compared with independent ones. Furthermore, the level of volatility reduction of branded hotels is greater for profit than for revenue, and profit may be the most important KPI for hotel investors. The magnitude of volatility reduction also increases as the measurement window length (number of years) increases. We also study the long-term returns of branded versus independent hotels. This study contributes to the understanding regarding the relationships between investment risk of branded versus independent hotels, extends the literature regarding hotel investment, and provides hotel investors and analysts information regarding risk to aid decisions such as developing, purchasing, holding, or disposing of hotel assets.

Does government debt impede firm innovation? Evidence from the rise of LGFVs in China

Does government debt impede firm innovation? We address this question by examining the effects of the debt accumulated by local government financing vehicles (LGFVs) across Chinese prefectures between 2006 and 2012 on industrial firms’ R&D spending and patents. We find that government debt reduces firms’ R&D expenditures and lowers firms’ number of new patents. One plausible explanation is that government debt raises firms’ capital costs, which limits innovation activities. Consistently, we find that the innovations of firms that are more likely to be financially constrained – small firms and firms with low cash flow – are more affected by the expansion of government debt. Our results imply that although government deficit spending may stimulate the economy in the short run, it could have negative repercussions for economic productivity in the longer run.

Investigation of factors responsible for delays in the execution of adequately funded construction projects

Abstract Many research efforts have identified funding as a critical factor responsible for the delays in the execution of construction projects. These funding challenges affect the client and contractors alike. However, there is limited information on why delays occur in sponsored projects with evidently adequate funding. Therefore, the study focuses on exploring the factors that impact the cash flow during the execution of sponsored construction projects. The multiple-site case-study method of qualitative research was adopted, involving five universities benefiting from the infrastructure funding provided by a government agency in Nigeria. The Delphi technique was used for data collection and analysis, complemented with interviews. The findings identified six factors causing the delays. They were divided into internal and external factors. The internal factors are faulty contractor selection processes resulting in delays by contractors and the failure to complete appropriate phases of a project. The external factors include the delays in the project management system of the funding agency in terms of inspection, monitoring, evaluation and progress certification. The research identified that the combined effect of internal and external factors negatively impacts the project cash flow, which in turn influences project delivery delays. Therefore, this study recommends improvements in the in-house contractor selection processes and the decentralisation of the project inspection, monitoring and evaluation operations of the funding agency. This will facilitate timely inspection, audit, and progress certification, enabling the early release of the second tranche of the project fund. This will ameliorate the negative effects arising due to low cash flow and associated delays in project delivery.

Financial liberalization and the investment-cash flow sensitivity

The decline and diminishment of investment-cash flow sensitivity remains a puzzle in literature. This paper attempts to address this puzzle by examining the heterogeneous effects of domestic financial liberalization and international financial integration on corporate investment-cash flow sensitivity. Using a large firm level data for 69 developed and emerging economies over the period 1995–2019, we provide robust evidence that firms in countries with more liberalized domestic financial markets exhibit lower sensitivity of investment to the availability of cash flows. Reducing financial constraints and then promoting external finance are possible mechanisms through which domestic financial liberalization affects investment-cash flow sensitivity. While the effect of international financial integration, on average, is less clear, our results show that increases in international financial integration promote investment more for firms with higher cash flows in high income economics but more for firms with lower cash flows in non-high income economies. Our paper provides new insights into the real effects of financial institutional arrangements on the economy.

Opportunity Analysis of Cow Livestock Investment in Gorontalo

High unemployment rate has encouraged the growth of various business units as job providers for productive age. This study aims to examine the business opportunities of cow farming in Gorontalo region. It uses combination of qualitative and quantitative method. The qualitative method is done by observation and interview. The quantitative analysis is done by calculating cash flow, net present value (NPV), internal rate of return (IRR), benefit cost ratio, and gross margin. The results showed that traditional system of cow farming business by self-management and profit sharing has profitable cash flow, NPV, IRR, BC ratios, and gross margin and worthy for selected. The Cash flow and NPV are positive and IRR level is greater than the required profit level. A semi-modern cow cage system for fattening produces lower cash flow, NPV, IRR, BC ratios, and gross margin. The cages cow breeding produces more attractive cash flow, NPV, IRR, BC ratios and gross margin. Keywords: investment, cow, fattening, breeding, cash flow, NPV, IRR. DOI: 10.7176/RJFA/12-22-13 Publication date: November 30th 2021

Investment efficiency of firms outside the business group

Using Korean firms between 1987 and 2010, we show that non-group firms suffer more from investment inefficiency if they operate in industries where group firms belong to larger business groups. We also find that this effect exists mainly during a period characterized by a capital supply shortage and low cash flow pledgeability to investors. Further analyses indicate that the effect is attributable not to human capital constraints, but external financing constraints imposed by business group firms and that causality runs from business group strength to investment inefficiency of non-group firms.

Consumers’ Perception towards Cashless Transactions and information Security in the Digital Economy

" A cashless economy is an economic system in which there is little or very low cash flow in society and goods and services are purchased and paid the amount through electronic media. A cashless economy is an economy in which transactions are made by debit cards, credit cards, e-wallet, cheques, or direct transfers from one account to another through e-banking. According to the Government of India, cashless transactions will maximize employment opportunities in the economy, avoid cash-related robbery thereby minimizing the risk of carrying physical cash. Cashless transactions will also decrease cash-related corruption and attract more foreign investors to the country. The present study focuses on the concept and methods of cashless transactions in India. Besides, the study examines the benefits and limitations of a cashless economy to the general public."