Cash Flow Volatility Research Articles

Unemployment Risk and Debt Contract Design

ABSTRACT We examine how firms’ contractual relationships with their employees affect the design of their debt contracts, and the use of financial covenants in particular. Viewing the firm as the nexus of both explicit and implicit contractual relationships, we argue that managers cater to their employees’ preferences when negotiating contractual terms with creditors. We argue that an increase in unemployment-insurance benefits reduces employees’ cost of job loss, which, in turn, allows managers to take more risk. First, we show that more generous benefits are associated with a higher operating leverage, operating cash flow volatility, and product-development frequency. We then find that loans initiated following an increase in unemployment-insurance benefits include a higher proportion of performance, rather than capital covenants. Overall, our study demonstrates how the design of debt contracts changes in response to arguably exogenous changes in employees’ collective tolerance—and, in turn, managers’ preferences—for risk. JEL Classifications: M41; G32; J60.

From low resource slack to inflexibility: The share price effect of operational efficiency

This study examines the relationship between operational efficiency (OE) and stock price crash risk (SPCR). While high OE is arguably associated with better firm performance, it also increases vulnerability to disruptions and exposure to SPCR. Using a sample of US firms from 1997 to 2018, the study finds a positive relationship between OE and SPCR; additional results suggest that firm cash flow volatility serves as the channel through which this relationship is mediated. The study also finds evidence that high-OE firms tend to suppress bad news from investors, which exposes them to SPCR. Furthermore, the study shows that the positive relationship between OE and SPCR beyond the optimal level hurts firm value, highlighting the importance of balancing efficiency improvement efforts with business risk management. The results of this study have implications for managers and owners seeking to mitigate tail risk in firm investment decisions, and underscore the importance of maintaining business flexibility in the pursuit of efficiency.

THE EFFECT OF DEBT LEVELS, CASH FLOW VOLATILITY, AND AMOUNT OF ACCRUALS ON PROFIT PERSISTENCE IN COMPANIES MANUFACTURING SUB-SECTORS OF VARIOUS INDUSTRIES LISTED ON INDONESIA STOCK EXCHANGE YEAR 2017-2021

This research was conducted to see how much influence the Level of Debt, Cash Flow Volatility, and Amount of Accruals have on Profit Persistence in Manufacturing Companies in the Various Industries Sub Sector in 2017-2021. The population in this study is the 2017-2021 Financial Statements for 9 Manufacturing Companies in Various Industrial Sub-Sectors, so the total sample is 45. This type of research uses a descriptive quantitative method with secondary data so that it can describe each variable in this study. The data will be processed using Statistical Product and Service Solution (SPSS) Version 25. The data analysis technique in this study uses descriptive analysis test, classic assumption test, coefficient of determination test, multiple linear regression analysis test, and uses a partial hypothesis test (t test ) and simultaneous test (F test) with a significance level of 0.05 . Based on the results of data analysis tests that have partially Debt Level has a negative and significant effect on Profit Persistence and Cash Flow Volatility has a negative but not significant effect, while the Accrual Amount has a positive and significant effect on Earnings Persistence., and the results of the study simultaneously stated that all independent variables significant effect on Profit Persistence simultaneously with the test results of the coefficient of determination showing an effect of 33.5%.

Patent trolls and capital structure decisions in high-tech firms

Under the growing threat of patent trolls, high-tech firms face substantial legal fees, increased cash flow volatility, and greater expected costs of distress. I show that the exposure to patent litigation leads to overly conservative capital structures in high-tech firms. My identification exploits a 2017 U.S. Supreme Court decision limiting the ability of patent trolls to seek favorable venue outside the defendant's incorporating state. Following the decision, firms incorporated in states with strong anti-patent troll laws increased leverage. The effects are driven by high-tech firms, the premier targets of patent trolls. Decreased cash flow volatility, especially in treated firms closer to financial distress, provides a key economic channel for my results.

Climate Change Exposure and Firm Performance: Does Managerial Ability Matter?

Using a firm-level measure of climate change exposure, this study examines the role of managerial ability in the association between climate change exposure and corporate performance. Based on a sample of 43,620 firm-year observations over the period between 2001 and 2021, the study documents that although increased climate change exposure reduces corporate performance, managerial ability moderates this relationship. Specifically, this study shows that higher managerial ability mitigates the negative effect of climate change risk on financial performance and cash flow volatility reported by prior studies. These results hold across different specifications and when addressing the potential endogeneity issue concerning managerial ability. The findings of this study are essential to build a complete picture of the effect of climate change exposure on corporate performance. A key implication of the findings is that firms exposed to climate change risk are encouraged to enhance their managerial ability to overcome the negative impact of climate change exposure on corporate performance.

DOES GREEN FINANCE SUPPORT TO REDUCE THE INVESTMENT SENSITIVITY OF ENVIRONMENTAL FIRMS?

This study aims to examine the financing cash flow sensitivity into the firm investment of Environment Sensitive Firms (ESFs). To improve the robustness of our analysis, we implement cluster regression to analyze the 300- firms listed on Shenzhen Stock Exchange. The findings of this study indicate that high-ESFs have more financing cash flow volatility in firm investment than low-ESFs. The firms can reduce this volatility by integrating green finance with their financing cash flows. Green finance helps to implement sustainable investment practices and reduces investment volatility by providing the solution to societal issues. It also assists to generate stable cash flows, lower investment risk, and a better governance structure.

Analisis Cash Flow Volatility, Sales Volatility, Leverage dan Earning Persistence

This study aims to analyze the effect of cash flow volatility, sales volatility, and leverage on earning persistence in Consumption sector companies listed on the indonesia stock exchange for the 2017-2020 periode. Samples taken using the purpose sampling method. The type of data used is secondary data sourced from the indonesia stock exchange website. The population in this reseacrh are Consumption sector companies listed on the indonesia stock exchange for the 2017-2020 periode. From a population of 51 Consumption sector companies, 25 companies were obtained as samples with an observation period of 4 years (2017-2020). The data analysis method used is multiple linear regression analysis. Based on the results of the research show that the cash flow volatility have a positive and significant effect on earnings persistence, sales volatility have a positive and significant effect on earnings persistence and leverage have a positive and significant effect on earnings persistence.

Environmental, social and governance performance and credit risk: Moderating effect of corporate life cycle

Using a sample of Chinese A-share listed companies from 2018 to 2021, this study examines the impact of ESG performance on credit risk. We find that: first, the ESG performance is positively related Merton's distance to default and credit rating, which indicates that firms with a better ESG performance have lower credit risk. Moreover, performance variability measured as the rolling standard deviation of ROA and cash flow is the key channel for ESG performance to affect credit risk. Good ESG performance reduces the volatility of earnings and cash flow, thereby reducing credit risk. Finally, compared with mature and older companies, the mitigation effect of ESG performance on credit risk is greater for growing companies. These findings are important for stakeholders of firms to consider firms' ESG performance in conjunction with corporate life cycle before investment.

Valuating the capital structure under incomplete information

Can higher uncertainty increase the valuation (market-to-book value) of young firms compared to more established ones? As the current market shows higher levels of uncertainty about companies’ expected cash flows and changes in firm value, the question of the fundamental convex relationship between the two becomes more relevant. This paper aims to study how cash flow uncertainty affects the capital structure/leverage of a firm over time. A simple Bayesian learning framework is employed to assess leverage ratios in the presence of parameter uncertainty about expected cash flow. This study provides an analytical solution for leverage as a function of firm age and explores the implications using numerical results. The model links market leverage with expected cash flow volatility and firm age. Young firms face uncertainty about their expected cash flows and hence their firm value. Managers continuously update their evaluation of leverage ratios when they observe realized cash flow until firms reach maturity. Therefore, the paper provides a novel explanation of why the leverage ratio for many start-ups increases over time: the resolution of uncertainty decreases upside shock expectations as the firm ages. This result is useful both for academics, who can test the formulas derived in this paper for various industries, countries, and conditions, and for practitioners, who can use them to calibrate algorithmic trading models when linking uncertainty and firm valuation.

Hedging firm's idiosyncratic risk from commodity financialization

We investigate the effect of commodity financialization on firm's idiosyncratic risk. Our results reveal a positive effect of commodity financialization on firm's idiosyncratic risk. Derivative usage and diversification strategy can negatively moderate the positive effect. Moreover, the positive effect of commodity financialization and the moderating effects of derivative usage and diversification strategy are more pronounced in firms with lower-quality information environment, lower hedging efficiency, and higher cash flow volatility. Additionally, we find that the relationship between the two hedging instruments is complementary, and the increased idiosyncratic risk caused by commodity financialization can be priced into the cost of equity.

Understanding the role of aggregate analyst attention in resolving stock market uncertainty

This paper investigates whether sell-side analyst attention effect extends to the aggregate stock market. Our findings demonstrate that: (i) aggregate analyst coverage negatively predict future stock market returns while controlling for a rich set of predictors related to economic fundamentals and investor sentiment. (ii) higher aggregate analyst coverage also precede lower market-wide cash-flow volatility, cash holdings, absolute magnitude of unexpected earnings, investor information-search demand, and greater capital expenditures, long-term debt, indicating that the negative return premium stems from less compensation for lower expected market uncertainty. (iii) long-short profits of overreaction-related and lottery-related anomalies significantly decrease following high levels of aggregate analyst attention. Our results highlight the important role of aggregate analyst attention in reducing stock market uncertainty and enhancing investor rationality, thereby mitigating anomalies induced by psychological biases.

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.

The Influence Of Leverage, Dividend Per Share, And Cash Flow Volatility On Hedging Decisions (Empirical Study of Manufacturing Companies in the Food and Beverage Industry Sub-Sector Listed on the IDX for the 2019-2021 Period)

This study aims to examine the effect of leverage, dividend per share and cash flow volatility on hedging decisions in food and beverage companies listed on the IDX during 2019-2021 which were selected based on certain criteria using purposive sampling. This research uses secondary data in the form of annual reports of food and beverage companies listed on the IDX during 2019-2021. The sample in the company is 25 x 3 years of research and the total sample is 75. The type of research used is quantitative research, the data used in this research is secondary data in the form of financial reports listed on the IDX. The analytical method used is logistic regression analysis which is processed using the SPSS program. The results showed that: leverage has no significant effect on hedging decisions. Dividend per share has no significant effect on hedging decisions. Cash flow volatility affects hedging decisions. The results of the study simultaneously leverage, dividend per share, and cash flow volatility variables influence hedging decisions. Keywords : Leverage, Dividend Per Share, Cash Flow Volatility, and Hedging Decisions.

Capital Expenditure, Kesempatan Bertumbuh, Volatilitas Arus Kas dan Cash Holding

Cash holding or the availability of cash is very important in a company so that the company must have a good cash management system, especially companies that are vulnerable to a liquidity crisis. This study aims to empirically examine the effect of capital expenditure, growth opportunities, and cash flow volatility on cash holdings. The research was conducted on property and real estate companies listed on the Indonesia Stock Exchange with a total sample of 30 companies. The analysis technique used is multiple linear regression analysis. The results showed that capital expenditure had a significant negative effect, growth opportunities did not have a significant effect, and cash flow volatility had a significant positive effect. The results of the study contribute to confirming the trade-off theory and the pecking order theory as well as providing an empirical picture of the effect of capital expenditure, growth opportunities, and cash flow volatility on the cash holdings of companies in the property and real estate sector.
 Keywords: Cash Holding, Capital Expenditure, Growth Opportunity, Cash Flow Volatility.

Sales Volatility, Operating Cash Flow Volatility, Debt, and Firm Size on Future Earnings Persistence

This study aims to find out the impact of sales volatility, operating cash flow volatility, debt, and firm size on earnings persistence in agricultural sector companies listed on the Indonesia Stock Exchange for the period 2009-2022. The sample in this study is 14 companies using the purposive sampling method. This type of research is quantitative research. The analytical tool used was SPSS with multiple linear regression testing. The results of the tests carried out are that sales volatility has a negative and insignificant effect on future earnings persistence, conversely, the volatility of operating cash flows and debt has a positive but not significant impact on future earnings persistence, but firm size have positive effect on future earnings persistence in agricultural sector companies listed on the Indonesia Stock Exchange for the 2009-2022 period. Suggestions can be submitted to management to monitor the company's sales value so that there are no significant changes in a very short period of time, and avoid recording errors or manipulation of the company's sales value.

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 volatility and leverage: Evidence from non-financial Jordanian companies

This study investigates the relationship between cash flow volatility and leverage in Jordanian firms. The research purpose is to investigate whether cash flow volatility affects a company’s capital structure in Jordan. Panel data analysis is used in this study for a sample of 72 shareholder non-financial companies in Jordan from 2009 to 2020. The findings show that cash flow volatility has a significant link with leverage, indicating that companies with higher cash flow volatility tend to use more debt financing. In addition, the study finds that firm size, return on assets, and tangibility are positively associated with leverage, while growth is not significantly related. The study suggests that firms in Jordan should take cash flow volatility in consideration when making capital structure decisions. The study provides evidence that cash flow volatility is a vital determinant of leverage in Jordanian companies. The findings suggest that managers should consider the cash flow volatility effect on the capital structure alternatives of their firms. AcknowledgmentI want to thank Amman Arab University for its support.

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.

Family Feud: Succession Tournaments and Risk‐Taking in Family Firms*

AbstractWe identify succession as a novel determinant of risk‐taking in family firms. We find significantly higher risk‐taking (mergers and acquisitions and cash flow volatility) and lower operating efficiency in firms controlled by families with multiple sons during the pre‐ rather than the postsuccession period compared to family firms with one or no sons. Presuccession risk‐taking by sons decreases the following inheritance law amendments that require sharing of wealth among heirs, bolstering the causal interpretation of our findings. An infusion of outside talent via daughters' marriages also alleviates the relative rank‐seeking behaviors of sons during succession tournaments.

Analysis of the volatility of cash flows in the field of labor relations for monitoring the sustainability of the Russian economy

The aim of this research paper is to assess the applicability of the payment system data provided by the Bank of Russia for a prompt monitoring of the labor relations situation. Considering the growth of precarization, the change in the dynamics of labor relations is considered in the article as an operational indicator of the onset of potential economic crises. Taking the Bank of Russia payment system data as a basis, it is possible to use the volatility of cash flows information in the field of labor relations to determine the state of the economy. A methodological approach to determining critical values of this indicator by applying the three-sigma rule is also given in the article. In addition, the research paper investigates the relationship between the emergence of non-standard practices of interaction between economic actors in the labor market and values of the cash flow in the field of labor relations.