The impact of cash flow volatility on firm leverage and debt maturity structure: evidence from China

2018 ◽  
Vol 8 (1) ◽  
pp. 69-91 ◽  
Author(s):  
Zulfiqar Ali Memon ◽  
Yan Chen ◽  
Muhammad Zubair Tauni ◽  
Hashmat Ali
Keyword(s):  
Standard Deviation ◽  
Cash Flow ◽  
Cash Flows ◽  
Debt Maturity ◽  
Percent Reduction ◽  
Content Type ◽  
Debt Maturity Structure ◽  
Maturity Structure ◽  
Cash Flow Volatility

Purpose The purpose of this paper is to investigate the influence of cash flow volatility on firm’s leverage levels. It also analyzes how cash flow volatility influences the debt maturity structure for the Chinese listed firms. Design/methodology/approach The authors construct the measure for cash flow variability as five-year rolling standard deviation of the cash flow from operations. The authors use generalized linear model approach to determine the effect of volatility on leverage. In addition, the authors design a categorical debt maturity variable and assign categories depending upon firm’s usage of debt at various maturity levels. The authors apply Ordered Probit regression to analyze how volatility affects firm’s debt maturity structure. The authors lag volatility and other independent variables in the estimation models so as to eliminate any possible endogeneity problems. Finally, the authors execute various techniques for verifying the robustness of the main findings. Findings The authors provide evidence that higher volatility of cash flows results in lower leverage levels, while the sub-sampling analysis reveals that there is no such inverse association in the case of Chinese state-owned enterprises. The authors also provide novel findings that irrespective of the ownership structure, firms facing high volatility choose debt of relatively shorter maturities and vice versa. Overall, a rise of one standard deviation in volatility causes 8.89 percent reduction in long-term market leverage ratio and 26.62 percent reduction in the likelihood of issuing debentures or long-term notes. Research limitations/implications This study advocates that cash flow volatility is an essential factor for determining both the debt levels and firm’s term-to-maturity structure. The findings of this study can be helpful for the financial managers in maintaining optimal leverage and debt maturity structure, for lenders in reducing their risk of non-performing loans and for investors in their decision-making process. Originality/value Existing empirical literature regarding the influence of variability of cash flows on leverage and debt maturity structure is inconclusive. Moreover, prior research studies mainly focus only on the developed countries. No previous comprehensive study exists so far for Chinese firms in this regard. This paper endeavors to fulfill this research gap by furnishing novel findings in the context of atypical and distinctive institutional setup of Chinese firms.

Debt Maturity Structure and Credit Quality

2014 ◽  
Vol 49 (4) ◽  
pp. 817-842 ◽  
Author(s):  
Radhakrishnan Gopalan ◽  
Fenghua Song ◽  
Vijay Yerramilli
Keyword(s):  
Bond Market ◽  
Debt Maturity ◽  
Yield Spreads ◽  
Credit Quality ◽  
Debt Maturity Structure ◽  
Rollover Risk ◽  
Maturity Structure

AbstractWe examine whether a firm’s debt maturity structure affects its credit quality. Consistent with theory, we find that firms with greater exposure to rollover risk (measured by the amount of long-term debt payable within a year relative to assets) have lower credit quality; long-term bonds issued by those firms trade at higher yield spreads, indicating that bond market investors are cognizant of rollover risk arising from a firm’s debt maturity structure. These effects are stronger among firms with a speculative-grade rating and declining profitability, and during recessions.

Pre-IPO cash flow volatility and aftermarket valuation

2019 ◽  
Vol 46 (1) ◽  
pp. 159-176
Author(s):  
Justin S. Cox
Keyword(s):  
Cash Flow ◽  
Cash Flows ◽  
Financial Statement ◽  
Ipo Underpricing ◽  
Content Type ◽  
Earnings Volatility ◽  
Ipo Pricing ◽  
Cash Flow Volatility ◽  
Highly Correlated ◽  
Practical Implications

Purpose The purpose of this paper is to examine how pre-IPO cash flow and earnings volatility influence both post-IPO pricing and valuation. This paper provides an empirical extension of Pástor and Veronesi’s (2003, 2005) argument that uncertainty surrounding a private firm’s expected profitability can impact how the firm is valued in the IPO aftermarket. Design/methodology/approach This paper includes a sample of 695 IPOs between 1996 and 2011. Pre-IPO financial statement data are hand collected from the EDGAR database. Pre-IPO cash flow and earnings volatility is computed using the standard deviation of the firm’s three years of cash flows and earnings prior to the IPO. Tobin’s Q serves as a measure of post-IPO firm valuation. This paper includes two subsamples to account for the “hot” IPO market of the late 1990s. Findings Firms with higher pre-IPO cash flow volatility are associated with higher post-IPO aftermarket valuations. This result holds for both the “hot” IPO and the later sub-sample. Pre-IPO earnings volatility does not influence aftermarket valuations, suggesting that only the uncertainty surrounding cash flows serves as a salient measure to IPO investors. Finally, IPO underpricing is associated with pre-IPO cash flow volatility, suggesting another channel in which IPO pricing is influenced. Research limitations/implications The hand collection for this paper is laborious and is limited to yearly cash flow and earnings numbers. The paper documents that quarterly and yearly cash flow and earnings volatility measures are highly correlated for the select stocks that allow for such testing. Further, a broader sample that accounts for more international IPO issues might corroborate the findings in this paper. Practical implications This study shows that investors both initially price and value IPO firms base on their pre-IPO cash flow volatility. Originality/value This is the first paper to examine the direct link between pre-IPO cash flow and earnings volatility on IPO aftermarket valuation and IPO pricing.

Extrapolation Bias and Robust Dynamic Liquidity Management

2021 ◽  
Author(s):  
Seokwoo Lee ◽  
Alejandro Rivera
Keyword(s):  
Cash Flow ◽  
Ambiguity Aversion ◽  
Cash Flows ◽  
Risk Models ◽  
Worst Case ◽  
Liquidity Management ◽  
Optimal Dynamic ◽  
Cash Flow Volatility ◽  
Future Cash Flows

We consider the optimal dynamic liquidity management of a financially constrained firm when its existing shareholders are risk neutral but ambiguity averse with respect to the firm’s future cash flows. The shareholders’ ambiguity aversion generates endogenous time-varying worst-case beliefs that overweight recent cash flow realizations, thereby providing a microeconomic foundation for extrapolation bias. Moreover, shareholders’ ambiguity aversion has different implications on firms’ liquidity management and recapitalization policies than risk. Models with risk alone imply that higher cash flow volatility increases firms’ payout and refinancing thresholds. By contrast, our model predicts that, when ambiguity-averse shareholders face a higher long-term cash flow uncertainty, they optimally reduce firms’ payout and refinancing thresholds. The implications for investment are also studied. This paper was accepted by Agostino Capponi, finance.

Crash risk and debt maturity: evidence from Australia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mostafa Hasan ◽  
Dewan Rahman ◽  
Grantley Taylor ◽  
Barry Oliver
Keyword(s):  
Stock Price ◽  
Fixed Effects ◽  
Positive Association ◽  
Debt Maturity ◽  
Crash Risk ◽  
Content Type ◽  
Panel Data Estimation ◽  
Debt Maturity Structure ◽  
Maturity Structure ◽  
Data Estimation

PurposeThe purpose of this paper is to examine the association between debt maturity structure and stock price crash risk in Australia.Design/methodology/approachThe authors employ panel data estimation with industry and year fixed effects. The paper uses a sample of 1,548 publicly listed Australian firms (8,661 firm-year observations) covering the 2000–2015 period.FindingsStock price crash risk is positively and significantly associated with the long-term debt maturity structure of firms. In addition, this positive association is more pronounced for firms with a more opaque information environment.Originality/valueThis is the first study to examine stock price crash risk in Australia. The findings are value relevant as it uncovers how debt maturity structure affects shareholders' wealth protection.

Industry peer effect and the maturity structure of corporate debt

2015 ◽  
Vol 41 (7) ◽  
pp. 714-733 ◽  
Author(s):  
Hong Kim Duong ◽  
Anh Duc Ngo ◽  
Carl B. McGowan
Keyword(s):  
Firm Performance ◽  
Stock Returns ◽  
Empirical Evidence ◽  
Information Acquisition ◽  
Debt Maturity ◽  
Future Research ◽  
Least Squares Regression ◽  
Content Type ◽  
Debt Maturity Structure ◽  
Maturity Structure

Purpose – The purpose of this paper is to examine the role of industry peers in shaping firm debt maturity decisions. Design/methodology/approach – The authors use idiosyncratic equity shocks as instruments to disentangle industry fixed and peer effects. The authors also employ a three-stage least squares regression (3SLS) model to capture the correlation among thee (short, medium, and long) debt maturity decisions. Findings – The authors find that a one standard deviation change in peer short (medium, long) maturity debt leads to a 50 percent (37 percent, 23 percent) change in firm corresponding maturity debt and that these mimetic behaviors are statistically significant within, but not between, firm size groups. The findings also reveal that firms that mimic the short and medium (long) debt maturity structure of their peers tend to increase (decrease) firm performance as measured by profitability, return-on-assets, and stock returns. Research limitations/implications – First, given the research design, the authors are constraint from pinpointing the exact date of the mimicking behaviors. This limitation prevents the authors from establishing the causality of the mimicking behavior and firm performance. Future research can extend the findings by solving this problem. Second, it should be interesting to address the question of whether mimicking behavior is good or bad for firm performance. The authors only compare the performance of Close Followers and Loose Followers; however, it would be more precise to compare the performance of mimicking firms with the performance of non-mimicking firms. Originality/value – First, the findings extend the debt maturity structure literature by providing empirical evidence that an important determinant of firm debt maturity is industry peer debt maturity. Since debt maturity directly influences firm risk and performance, it is important for debt and equity holders to know how firms choose their debt maturity so that they can estimate their investment risk precisely. Second, the paper provides new empirical evidence supporting the information acquisition and principal-agent theories in demonstrating that firm performance increases when managers herd over short and medium debt maturity decisions and decreases when managers herd over long debt maturity decisions.

scholarly journals Earnings management and debt maturity: Evidence from Italy

2020 ◽  
Vol 17 (3) ◽  
pp. 179-186 ◽  
Author(s):  
Andrea Rey ◽  
Danilo Tuccillo ◽  
Fabiana Roberto
Keyword(s):  
Earnings Management ◽  
Academic Community ◽  
Debt Maturity ◽  
Accrual Quality ◽  
Debt Maturity Structure ◽  
Total Debt ◽  
Maturity Structure ◽  
Decision Making Processes ◽  
One Year

In this work, we examine whether earnings management affects the debt maturity structure of Italian non-SMEs. We employ accruals quality as a proxy for earnings management. We measure the accrual quality as the absolute value of residual reflects the accruals that are not related to cash flow realized in the current, following or previous year. We measure the debt maturity in two ways. First, we consider it as a dummy variable that takes the value equal to 1 if some of the debt is long-term (exceeding one year), and 0 otherwise. Second, we compute the debt maturity as the ratio of long-term debt to total debt. We employ a quantitative approach, carrying out several regressions (probit, logit, and tobit) analyses to investigate the effect earnings management on debt maturity structure, using financial statement data of 1,001 Italian non-SMEs sampled over the period 2011-2017. This paper provides theoretical and practical findings that support the literature on earnings management. First, the study confirms that accrual quality can use as a proxy of earnings management by the academic community. Then the findings show that earnings management is negatively associated with the possibility to access to long-term debt, and with a proportion of long-term debt in total debt. This evidence may support the managers when they have to plan the financial structure, the lenders and the creditors in their decision-making processes, and the policymakers when they have to set programs aimed to make easier the access to external financial resources.

scholarly journals Generational Socioemotional Wealth and Debt Maturity: Evidence from Private Family Firms of GIPSI Countries

2021 ◽  
Vol 13 (12) ◽  
pp. 67
Author(s):  
Oscar Domenichelli ◽  
Giulia Bettin
Keyword(s):  
Sovereign Debt ◽  
Family Firms ◽  
Conflicts Of Interest ◽  
Debt Crisis ◽  
Debt Maturity ◽  
Socioemotional Wealth ◽  
Debt Maturity Structure ◽  
Maturity Structure ◽  
Generation Family

In this paper we investigate the relationship between generational socioemotional wealth (SEW) and debt maturity structure in private family firms of GIPSI countries for the period 2010-2018. This appears to be quite an important issue to study, given that SEW is a peculiar aspect of family firms and its impact on the debt maturity structure, still relatively unexplored, is likely to change according to the generation running the family business. We show that the importance attached to SEW decreases when moving from the firms’ founder to the subsequent generations, with a negative effect on the amount of long-term debt. The forward-looking orientation of first-generation family firms favours long-term credit by banks in order to expand a healthy business which can be inherited by future generations. These businesses are hence perceived as less risky and more value-creating by external creditors, compared to later-generation family firms. Alternatively, SEW preservation is often less of a target in later-generation family firms, because some descendants consider the firm simply as a source of extra finance and conflicts of interest often arise between multiple generations or different family branches entering the business. Short-term debt may then be employed as a signaling effect of the quality of the firm. At the same time, borrowing long-term capital may become difficult if lenders question the creditworthiness of these businesses. This issue emerged dramatically during the sovereign debt crisis, when a significant contraction of credit to firms was observed throughout the GIPSI countries.

scholarly journals The long-term horizon of family firms in M&A: The impact on research investments and debt maturity structure

2017 ◽  
Vol 15 (1) ◽  
pp. 108-122 ◽  
Author(s):  
Fabio Quarato
Keyword(s):  
Family Firms ◽  
Debt Maturity ◽  
Bank Debt ◽  
Growth Strategies ◽  
Debt Maturity Structure ◽  
Maturity Structure ◽  
Research Investments ◽  
The Impact ◽  
External Growth

Despite family business is the most widespread ownership structure worldwide, there is a lack of evidence on the impact of external growth strategies on their capital structure. Although most researches showed that the risk of losing control leads family firms to a lower level of debt, this article sheds new light on debt maturity structure and innovation investments when family firms embrace an acquisition path. In particular, I argue that family firms will use bank debt to a lower extent than nonfamily firms when they embrace an external growth strategy and, as a consequence, they are more likely to avoid cuts in research investments and focus more on long term debt. These hypotheses are consistent with agency theory arguments, as family principals exercise a more effective monitoring due to the larger ownership stake and the desire to pass the company on the offspring in profitable conditions. By having access to a panel data, I analyse acquisitions carried out in the period 2000-2013 by all Italian companies with turnover exceeding 50 million Euros, and the results support the long term perspective of family firms. In particular, family firms will use less bank debt to finance acquisitions, avoiding cutting research investments and relying on a more balanced debt maturity structure.

scholarly journals Ownership control and debt maturity structure: evidence from China

2014 ◽  
Vol 10 (3) ◽  
pp. 385-403 ◽  
Author(s):  
Wenjuan Ruan ◽  
Grant Cullen ◽  
Shiguang Ma ◽  
Erwei Xiang
Keyword(s):  
Discrimination Problem ◽  
Institutional Development ◽  
Debt Maturity ◽  
Financial Reform ◽  
Short Term ◽  
Content Type ◽  
Debt Maturity Structure ◽  
Data Limitations ◽  
Maturity Structure ◽  
Ownership Control

Purpose – The authors examine the debt maturity structure of Chinese listed companies during the period when bond market was under-developed and the majority of commercial banks were owned by the state. The purpose of this paper is to answer why and how the different ownership control types impact the firms’ preference and accessibility to either long- or short-term debts. Design/methodology/approach – The univariate analysis was used to test the differences of debt maturity choices for firms grouped by ownership control types, profitability and institutional development. Then, logit regression and ordinary least squares regression were applied to examine the determinants of ownership control types in debt maturity structures. Findings – Compared to privately controlled firms, state-owned enterprises had greater access to long-term debt and used less short-term debt during the sample period. Evidences also indicate that the on-going financial reform has increased the motivation of banks to consider company profitability in their lending decisions. However, state-owned banks still discriminate private firms in allocation of financial resources, particular in less-developed regions. Research limitations/implications – Due to the research scope and data limitations, the authors cannot take some factors into consideration, such as collateral, guarantee, credit ranking, financing agreement and leasing obligation. Originality/value – This study extends the existing literature in three ways. First, the authors investigate the bank discrimination problem into the loan term structure. Second, the authors recognise the effect of financial reform on alleviation in bank discrimination problem. Finally, the authors take the consideration of institutional development of firms’ location areas in their analyses.

scholarly journals Debt maturity structure, institutional ownership and accounting conservatism

2019 ◽  
Vol 4 (1) ◽  
pp. 35-51 ◽  
Author(s):  
Mahdi Salehi ◽  
Mohsen Sehat
Keyword(s):  
Significant Relationship ◽  
Stock Exchange ◽  
Panel Data Analysis ◽  
Institutional Ownership ◽  
Debt Maturity ◽  
Accounting Conservatism ◽  
Content Type ◽  
Debt Maturity Structure ◽  
Maturity Structure ◽  
The Impact

Purpose The purpose of this paper is to examine the impact of debt maturity structure and types of institutional ownership on accounting conservatism by using different financial variables and proxies. Design/methodology/approach Employing panel data analysis in the R programming language, the authors test their hypotheses on a sample of 143 (858 firm-year observations) companies listed on the Tehran Stock Exchange during 2011–2016. Findings Using Basu (1997) and Beaver and Ryan (2000) models as proxies for accounting conservatism, the findings suggest a non-significant relationship between accounting conservatism and debt maturity structure. Contrary to the primary expectation, the results indicate that short-maturity debts are also non-significantly and negatively associated with accounting conservatism in financially distressed firms. Finally, using both conservatism measures, the authors document that there is no significant relationship between both active and passive institutional ownership and accounting conservatism as well as debt maturity structure. Originality/value The current study is the first study conducted in a developing country like Iran, and the outcomes of the study may be helpful to other developing nations.

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