Cash Flow Prediction Research Articles

IFRS Adoption, Legal Systems and the Voluntary Disclosure of Human Capital: Cross-country Evidence from the Banking Industry

This study examines the value relevance of voluntary human capital disclosures by banks and the effect of the adoption of International Financial Reporting Standards (IFRS) on the value relevance of these disclosures. Human capital disclosures allow capital market participants to evaluate the intellectual capital of the disclosing banks, which in theory may enable market participants to assess the competitiveness of the bank’s human resource strategy and the productivity of the workforce vis-a-vis benchmark performance. While IFRS does not mandate particular form of voluntary human capital disclosures (VHCD), VHCD is expected to possess information content that is useful to market participants in their equity pricing decisions. The study is conducted using a cross-country sample of 10,199 bank-years that reported labor costs. Market participants, however, are found to relate VHCD negatively to prices and returns in common and civil law countries alike. Results also suggest that IFRS adoption reduces the value relevance of VHCD due to the abundance of alternative information provided under the more comprehensive IFRS framework that helps in the prediction of future cash flows. Finally, market participants find VHCD value relevant after IFRS adoption in common law countries potentially because it reduces uncertainty about an important determinant of the bank’s future performance. On the other hand, market participants in civil law countries view VHCD as value relevant but coming at added time and financial investment. As an application of the results to an emerging economy, the implications for the Egyptian accounting profession, banking sector and capital markets are discussed.

IFRS Adoption, Legal Systems and the Voluntary Disclosure of Human Capital: Cross-country Evidence from the Banking Industry

This study examines the value relevance of voluntary human capital disclosures by banks and the effect of the adoption of International Financial Reporting Standards (IFRS) on the value relevance of these disclosures. Human capital disclosures allow capital market participants to evaluate the intellectual capital of the disclosing banks, which in theory may enable market participants to assess the competitiveness of the bank’s human resource strategy and the productivity of the workforce vis-à-vis benchmark performance. While IFRS does not mandate particular form of voluntary human capital disclosures (VHCD), VHCD is expected to possess information content that is useful to market participants in their equity pricing decisions. The study is conducted using a cross-country sample of 10,199 bank-years that reported labor costs. Market participants, however, are found to relate VHCD negatively to prices and returns in common and civil law countries alike. Results also suggest that IFRS adoption reduces the value relevance of VHCD due to the abundance of alternative information provided under the more comprehensive IFRS framework that helps in the prediction of future cash flows. Finally, market participants find VHCD value relevant after IFRS adoption in common law countries potentially because it reduces uncertainty about an important determinant of the bank’s future performance. On the other hand, market participants in civil law countries view VHCD as value relevant but coming at added time and financial investment. As an application of the results to an emerging economy, the implications for the Egyptian accounting profession, banking sector and capital markets are discussed.

Implications of Impairment Decisions and Assets' Cash-Flow Horizons for Conservatism Research

ABSTRACT Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments. JEL Classifications: G32; L25; M41; M42.

Predictability of Future Cash Flows and Cash Holdings

Predictability of Future Cash Flows and Cash Holdings

Audit Quality And Accrual Reliability: Evidence From The Korean Stock Market

This study empirically investigates whether a high-quality audit improves the reliability of the components of total accruals using earnings persistence and cash flow predictability. I find that, for firms audited by Big Four auditors, their current or noncurrent assets-related accruals, which are less reliable (“more subjective in measurement”), lead to higher earnings persistence and future cash flow predictability than those of firms audited by non-Big Four auditors. These results suggest that high-quality auditors more effectively evaluate the reasonableness of accrual measurement based on more sufficient and appropriate audit evidence, leading to enhanced accrual reliability.

The Role of Multiple Impairment Indicators in Conditional Conservatism

Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments.

Rational Predictability of Real Estate Prices

Serial correlations in asset prices are often associated with irrational investment decisions (e.g., speculative bubbles) or inefficient markets. This paper shows that even asset prices determined rationally in an efficient market become predictable if underlying cash flows contain predictable components. In particular, I show that cash flows from real estate tend to contain a predictable “overshooting” component, due to slow adjustments in asset supply. Such predictable cash flows result in overshooting prices of real estate even though rational capitalization rates counter-act the price overshooting. The predictability is unlikely to disappear even after various real estate derivatives are traded. The analysis indicates that the rational benchmark price must be carefully modeled when one tests irrationality or inefficiency in asset prices.

Managerial Motivation for Claiming a Goodwill Impairment Loss During a Period of Economic Prosperity

This study examines the link between goodwill impairment losses and firms’ relative economic performance during a period of economic prosperity. Results from the academic literature stream support both the informative and uninformative aspects of goodwill accounting. From the informative perspective, goodwill impairment losses improve earnings’ predictability of cash flows and stock returns. From the uninformative side, goodwill impairment losses have been linked to opportunistic management behavior. Thus, gaps exist in the literature stream pertaining to the timing and managerial motivation for claiming goodwill impairment losses. Our study fills a gap in the literature by examining firms’ goodwill impairment loss write-offs during a particular period, specifically the year of 2006, a period of economic prosperity. By examining the association of firms’ goodwill impairment loss write-offs during this period with both economic performance and accounting indicator variables, managerial motivation for claiming goodwill impairment losses becomes clearer. We find economic performance indicators do not support firms’ goodwill impairment loss write-offs. Further, accounting indicator variables are associated with firms’ goodwill impairment loss write-offs. Also, goodwill impairment losses provide a marginal increase in the explanatory power of operating earnings as a predictor of the following period’s operating cash flows. These results do not support the informative role of goodwill accounting. Rather, firms manage their goodwill impairment loss write-offs in conjunction with other accruals within a much broader earnings management strategy. Our study extends prior research related to firms’ contracting incentives with respect to goodwill impairment loss write-offs.

Optimizing Cash-Flow-at-Risk in Construction Projects: A Cost Reduction Approach

Project managers normally are facing with difficulties behind management of project cash flow, which requires distinguished methods and appropriate tools to manage negative cash flows. Cash-Flow-at-Risk (CFaR) model is an efficient approach to predict cash flow trend. In this study, all risk factors affecting project management environment have incorporated to predict an accurate project cash flow. Then, a response surface method (RSM) is applied to determine optimal level of risk. The results have successfully implemented through a case study to demonstrate the applicability of the proposed method.

The Impact of Dividend Distribution on Cash Flow Predictability in Tehran Stock Exchange

This study investigates the impact of dividend distribution on the predictability of cash flow data. Predictability is defined as the ability of an accounting variable to predict future cash flows. Dividend Distribution among shareholders is an indicator for predicting cash flow. The period of this study is from 2007-2012 and the sample is 121 companies listed on the Tehran stock exchange. In this research, the dependent variable is cash flow predictability and the independent variable is dividend distribution as well as control variable is firm size. Multivariate regression analysis was used to test the research data. According to the research findings, cash flow forecasting has normal distribution and the changes in future cash flows are because of changes in dividend distribution (cash distributions to shareholders). The research findings show firm size has the same effect on free cash flow and operating cash flow. DOI: 10.5901/mjss.2015.v6n6s2p591

Public versus Private Cost of Capital with State-Contingent Terminal Value

The choice of infrastructure delivery through public versus private provision is driven by investment and operational efficiency, and cost of capital differentials. While the first two factors are measurable --- albeit with mixed results --- the appropriate discount rate instigates methodological discussions. Efficient market hypothesis supporters propose a single discount rate, independently of the source of financing; welfare economists advocate for a lower discount rate for public-sector cash flows. I revisit this discussion with attention to state-contingent terminal value --- including regulatory discretion, expropriation, risk transfer schemes, limited liability, multilevel administrations, and catastrophic events --- and provide an empirical test of lower price volatility for government-sponsored enterprises. Finally, I propose an integrated approach with a dual discount rate treat: a common discount rate for predictable cash flows and divorced discount rates for terminal cash flows.

The Effect of Information on Uncertainty and the Cost of Capital

AbstractIt is widely held that better financial reporting makes investors more confident in their predictions of future cash flows and reduces their required risk premia. The logic is that more information leads necessarily to more certainty, and hence lower subjective estimates of firm “beta” or covariance with other firms. This is misleading on both counts. Bayesian logic shows that the best available information can often leave decision makers less certain about future events. And for those cases where information indeed brings great certainty, conventional mean‐variance asset‐pricing models imply that more certain estimates of future cash payoffs can sometimes bring a higher cost of capital. This occurs when new or better information leads to sufficiently reduced expected firm payoffs. To properly understand the effect of signal quality on the cost of capital, it is essential to think of what that information says, rather than considering merely its “precision,” or how strongly it says what it says.

On the determinants of return on equity in South Africa's financial services industry

This study examines the factors that determine the return on equity (ROE) of financial companies listed on the Johannesburg Securities Exchange (JSE). Two empirical strategies were adopted: the DuPont model and a multifactor Arbitrage Pricing Theory (APT). Using the financial data of 73 companies and macro-economic indicators from 2002 to 2012, the study found that there was a positive relationship between profit margin and ROE, which can be enhanced if managers employ cost leadership strategies. Companies with predictable cash flows can afford high levels of debt and therefore high ROE, while companies characterised by unpredictable market conditions should use debt with caution. We found a positive relationship between interest rates and ROE for banks, insurance and real estate companies, which may suggest that managers employ short-term duration gap strategies in managing assets and liabilities mismatch rather than relying on long-term strategies. Inflation for banks, insurance and real estate companies is inversely related to ROE, and financial firms are better off immunising their portfolios against revenue erosion.

Relevance of Goodwill Impairments to Cash Flow Prediction and Forecasting

This study examines the contribution of goodwill impairment information to the prediction and forecasting of future operating cash flows. Extending the framework of Barth, Cram, and Nelson, we find that explicitly including goodwill impairments incrementally improves 1-year-ahead cash flow prediction and forecasting. Improved cash flow forecasting is present over the entire 2001-2009 study period as well as for each year within the study window. In addition, goodwill impairments retain their significance and predictive power when other non-recurring charges (e.g., restructuring, asset write-downs, and merger and acquisition costs) are added to the model, both individually and aggregately, and when market-related information (i.e., change in market capitalization) is included in the model. While these findings are validated by in-sample prediction techniques, this study is also one of only a few studies to investigate the incremental, out-of-sample predictive power of non-current accruals on reported (as opposed to computed) operating cash flows. Analysts, investors, creditors, and others interested in future cash flows should separately consider goodwill impairment information, when available, to improve the accuracy of cash flow prediction and forecasting.

Comparative Predictive Abilities of Earnings and Operating Cash Flows on Future Cash Flows: Empirical Evidence from Ghana

Cash flow prediction is an essential component of economic decision making, particularly in investment and credit evaluation. This paper examines the comparative predictive ability of earnings and operating cash flows variables on future operating cash flows within a developing economy’s setting. Ordinary Least Squares (OLS) method is used to develop regression models over the period of 2002 to 2012. Current operating cash flows, as proxy for future operating cash flows, are regressed on past one, two and three years of earnings and operating cash flows as predictors. Results from the regression analysis reveals earnings and operating cash flows are significant in predicting future operating cash flows but have different predictive powers with earnings providing a superior comparative predictive ability on future cash flows. The paper therefore concludes that earnings are a better predictor of future operating cash flows than historical operating cash flows itself.

Credit conditions and stock return predictability

U.S. stock return predictability is analyzed using a measure of credit standards (Standards) derived from the Federal Reserve Board׳s Senior Loan Officer Opinion Survey on Bank Lending Practices. Standards is a strong predictor of stock returns at a business cycle frequency, especially in the post-1990 data period. Empirically, a tightening of Standards predicts lower future stock returns. Standards performs well both in-sample and out-of-sample and is robust to a host of consistency checks. Standards captures stock return predictability at a business cycle frequency and is driven primarily by the ability of Standards to predict cash flow news.

CASH FLOW PREDICTION FOR CONSTRUCTION PROJECT USING A NOVEL ADAPTIVE TIME-DEPENDENT LEAST SQUARES SUPPORT VECTOR MACHINE INFERENCE MODEL

Cash flow information is crucial for the decision making process in construction management. Due to the complexity and the dynamic progress of a construction project, forecasting cash flow demand throughout various phases of the project remains a challenging problem. This article presents a novel inference model, named as Adaptive Timedependent Least Squares Support Vector Machine (LS-SVMAT) for cash flow prediction. In the LS-SVMAT, Least Squares Support Vector Machine (LS-SVM) is integrated with an adaptive time function (ATF) to generalize the inputoutput mapping of cash flow. Since cash flow data are time-dependent, data points recorded in different periods can contribute dissimilarly to the training process of the prediction model. Thus, the role of the ATF is to determine the appropriate weight associated with each data point at a specific time period. By doing so, LS-SVMAT can better deal with the dynamic nature of the time series. Furthermore, to identify the optimal parameters for the inference model, Differential Evolution (DE) based cross validation process is utilized in this research. Comparing to other benchmark methods, the proposed model has identified the most appropriate time function and has yielded superior forecasting results. Therefore, LS-SVMAT can be a promising tool for construction managers in cash flow prediction.

Traditional Ratios vs. Cash Flow based Ratios: Which One is Better Performance Indicator?

Cash flow prediction is involved in a number of economic decisions, particularly in investment. Previous researches conducted in the United States have provided inconsistency in the results of investigating accounting data, cash flow and accrual accounting data in predicting future cash flows. No published research has studied cash flow prediction in Bangladesh. The current study investigates the ability of accrual and cash flows accounting information to predict future cash flows of Bangladeshi listed companies. This study analyses Balance sheet, Income Statement and Cash Flow statement. In addition, cash flow ratios and Income statement based ratios are calculated in order to get the same pattern of result and to make comparisons. Data used in this study are collected from the financial statements of non-manufacturing companies listed on the Stock Exchange of Bangladesh from 2001 to 2010. Cash flow data are selected directly from the cash flow statements. Empirical results show that cash flow and accrual component of earnings can be used to predict future cash flows of Bangladeshi listed companies and cash flows have better predictive power than traditional based ratios. However, the results indicate that cash flow ratios are sometimes providing the better and accurate picture of the companies. In addition, this study finds that our economic crises as well as abnormal condition of our stock market are caused due to the manipulation of accounting data for consecutive financial year.

Corporate Governance and Earnings Predictability in Banks

This study examines the impact of corporate governance on earnings predictability in large banks from 35 countries over the period 2004-2010. We find that board structure and CEO power have a significant positive influence on earnings predictability of future cash flows although these findings vary for emerging markets and between common and civil law countries. Board structure and CEO power are more effective in predicting future cash flows in civil law countries whereas in common law countries risk governance is a more accurate predictor of earnings. Similarly, we find differences between developed and emerging countries. While in both domains there is no qualitative difference in CEO power to predict future cash flows, board structure and risk governance are less effective in emerging countries.

Did Japanese-SOX have an impact on earnings management and earnings quality?

Purpose– The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan.Design/methodology/approach– This archival study compares earnings management and earnings quality of firms that disclose at least one material weakness with a sample matched on size and industry without a material weakness.Findings– The authors investigate whether the differences in regulations, corporate governance and regulatory environment acceptance influence earnings management and earnings management of Japanese listed firms, relative to findings in the USA. They found the Japanese results to be slightly different from the results found in previous USA studies. First, the time-series observations suggest that while accruals management and real earnings management remained unchanged for control firms, accruals management and real earnings management increased for material weaknesses disclosing firms following J-SOX. The regression analyses suggest that accruals management for both the groups is significant in the pre-and post-J-SOX periods, but that real earnings management declined for both the groups post-J-SOX. Second, while, both accruals quality and accuracy of cash flow predictions improved in the post-J-SOX period.Research limitations/implications– The sample of Japanese firms disclosing a material weakness is small because the number of firms that disclose internal control deficiencies is decreasing in Japan. The authors have no evidence that their results are not generalizable to a larger sample and leave this for future research.Practical implications– The authors provide evidence that J-SOX, which does not have a direct reporting system, does not constrain earnings management. Their results drive the regulator to reconsider whether the reporting system works in the Japanese business environment. Additionally, their results show that J-SOX has no effect on earnings management; thus, regulators need to reconsider the governance function of directors and internal auditors. This paper communicates to the world how J-SOX works in Japan through changes in earnings quality and management post J-SOX and the root problems.Originality/value– This paper is the first (of which the authors are aware) to examine whether J-SOX impacted both earnings management and earnings quality in Japan. This paper discusses how the differences in regulations and corporate governance as well as the differences between USA-SOX and J-SOX may explain the results observed in Japan. This paper provides results regarding whether J-SOX improved earnings quality.