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.

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.

Protecting cash flows during a major crisis

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Keyword(s):  
Crisis Management ◽  
Cash Flow ◽  
Design Methodology ◽  
Reading Time ◽  
Business Processes ◽  
Cash Flows ◽  
Marketing Strategies ◽  
Content Type ◽  
Pertinent Information ◽  
Practical Implications

Purpose This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies. Design/methodology/approach This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context. Findings Major crises like the Covid-19 pandemic can negatively impact on cash flow of small B2B firms. But SMEs affected can address the issue by implementing relevant marketing strategies associated with three key business processes to enhance their crisis management. Originality/value The briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

A matter of others' money: How cash holdings of other firms affect a firm’s cash holding?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jisaba Jinkrawee ◽  
Ravi Lonkani ◽  
Suchanphin Suwanaphan
Keyword(s):  
Stock Exchange ◽  
Cash Flows ◽  
Cash Holding ◽  
Content Type ◽  
Listed Firms ◽  
Developed Markets ◽  
Stock Exchange Of Thailand ◽  
Peer Firms ◽  
Cash Flow Volatility ◽  
Practical Implications

PurposeThis study examines the effects of comparable companies, within the same industry, on cash-holding (CH) levels of a specific firm in the Stock Exchange of Thailand (SET). Peer effects are hypothesized to affect a firm's average CH levels.Design/methodology/approachThe authors use data of listed firms in the Thai stock markets from 1995 to 2018. The sample consists of 5,277 firm-year observations. The authors perform robustness tests by incorporating gross domestic product, economy and competitiveness.FindingsPeer firms' CH levels correspond positively to the specific firm's CH. This strengthens further for firms with high cash flow volatility during periods of high competition. Unfavorable economic periods also motivate the association between a firm's CH and peer firms' CH.Practical implicationsA policy on CH should account for cash held by peer firms. Firms can justify their CH policy as compatible with peers' cash flows, especially during periods of competitiveness and an unfavorable economy.Originality/valueThe authors provide novel evidence on how emerging markets' CH levels differ from those in developed markets and propose adjusted explanations for the rivalry- and information-based theories. The findings add substantial knowledge to corporate finance by arguing that CH policies are based on peer firms' strategic moves.

Analyst reaction to non-articulation between the balance sheet and the statement of cash flows

2019 ◽  
Vol 21 (1) ◽  
pp. 163-184
Author(s):  
Peter Frischmann ◽  
K.C. Lin ◽  
Dilin Wang
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
Cash Flows ◽  
Negative Influence ◽  
Financial Statement ◽  
Earnings Forecast ◽  
Content Type ◽  
Cash Flow Forecasts ◽  
Analyst Earnings ◽  
Statement Of Cash Flows

Purpose The purpose of this paper is to investigate the effect of non-articulation on analyst earnings forecast quality. The authors look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion and forecast bias. Design/methodology/approach The empirical tests are primarily based analyst earnings and cash flow forecasts covered by Institutional Broker Estimate System and financial statement information obtained from Compustat North America database. Findings The authors hypothesize and find that non-articulation is positively related to analyst forecast dispersion, forecast accuracy and forecast bias for one-year ahead of earnings. The effects of non-articulation on analyst earnings forecast inaccuracy and bias are neutralized when the analyst issues a cash flow forecast and when such forecast provides accurate information regarding the forecasted firm’s operating cash flow. On the other hand, cash flow forecast issuance alone does not mitigate the negative influence of non-articulation. Research limitations/implications The sample selection procedure limits the generalizability of the findings. Practical implications The findings confirm CFA Institute and prior research asserting that non-articulation deteriorates the quality of earnings forecasts by financial statement users (more specifically, the financial analysts). The authors add to the literature by documenting that accurate cash flow forecasts help analysts mitigate the negative influence of non-articulation on earnings forecast quality. Originality/value It remains an empirical question whether non-articulation between the balance sheet and the statement of cash flows has an effect on financial statement users’ ability to assimilate financial information. The paper highlights the detrimental effect of non-articulation by documenting the relationship between the non-articulation and the quality of earnings expectation.

The public-private partnership valuation paradox

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Stephen Gray ◽  
Jason Hall ◽  
Grant Pollard ◽  
Damien Cannavan
Keyword(s):  
Mathematical Proof ◽  
Systematic Risk ◽  
Cash Flows ◽  
Current Theory ◽  
Apparent Paradox ◽  
Content Type ◽  
The Public ◽  
The Past ◽  
Alternative Approaches ◽  
Practical Implications

Purpose In the context of public-private partnerships (PPPs), it has been argued that the standard valuation framework produces a paradox whereby government appears to be made better off by taking on more systematic risk. This has led to a range of approaches being applied in practice, none of which are consistent with the standard valuation approach. The purpose of this paper is to demonstrate that these approaches are flawed and unnecessary. Design/methodology/approach The authors step through the proposed alternative valuation approaches and demonstrate their inconsistencies and illogical outcomes, using theory, logic and mathematical proof. Findings In this paper, the authors demonstrate that the proposed (alternative) approaches suffer from internal inconsistencies and produce illogical outcomes in some cases. The authors also show that there is no problem with the current accepted theory and that the apparent paradox is not the result of a deficiency in the current theory but is rather caused by its misapplication in practice. In particular, the authors show that the systematic risk of cash flows is frequently mis-estimated, and the correction of this error solves the apparent paradox. Practical implications Over the past 20 years, PPP activity around the globe amounts to many billions of dollars. Decisions on major infrastructure funding are of enormous social and economic importance. Originality/value To the best of the authors’ knowledge, this study is the first to demonstrate the flaws and internal inconsistencies with proposed valuation framework alternatives for the purposes of evaluating PPPs.

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

scholarly journals Simulation evidence on the properties of alternative measures of working capital accruals

2017 ◽  
Vol 25 (4) ◽  
pp. 378-394
Author(s):  
Javad Izadi Zadeh Darjezi ◽  
Homagni Choudhury ◽  
Alireza Nazarian
Keyword(s):  
Cash Flow ◽  
Estimation Error ◽  
Explanatory Power ◽  
Cash Flows ◽  
Working Capital ◽  
Accrual Quality ◽  
Content Type ◽  
Explanatory Variables ◽  
Study Results ◽  
The Uk

Purpose This paper aims to investigate the specification and power of tests based on the DD and modified DD model through the UK data between years 2000 and 2013, and make comparisons with tests using working capital accruals creating a measure of accruals quality as the standard deviation of the residuals value from firm-specific regressions base on working capital accruals on last, current and one-year-ahead cash flows from operations. Design/methodology/approach This study focuses both on the DD model and modified DD model to find out which of them can more accurately capture total working capital accrual estimation error and accrual quality. According to the DD model, the past, current and future net cash from operating activities as the three years’ operating cash inflows or outflows become omitted and correlated variables. In this study, the authors continue to document residuals from the DD and MDD models to demonstrate properties that are more consistent with behaviours of accruals estimation errors. Therefore, in this study, the authors are looking to compare the results from both the MDD and DD models and find which one of them is more effective in explaining the working capital accruals in the UK. Findings The authors find that adding additional explanatory variables may add additional explanatory power of variables to the DD model and extent to which accruals map into cash flow insights based on the UK data. This study is empirically well fitting with the internal workings of cash flows. As investors fixate only on the accounting earnings, they may fail to reflect fully on information contained within cash flow components and working capital accruals of current and future earnings. Originality/value The authors compare different equation to cover more items of working capital accruals. In addition, after examining earnings and accrual quality, the findings show that the average UK company behaviour was quite similar to the behaviour that was founded earlier for both models in the USA. Furthermore, this study results show that more volatility of sales, cash flow, accruals and earnings make a lower accrual quality. The results demonstrate that both models can capture the power to predict working capital accruals. Moreover, we find that adding additional explanatory variable of employee growth rate adds additional explanatory variables to DD model.

scholarly journals Kidas Model, Cash Flow, and Size Case of Palestine

2021 ◽  
Vol 16 (4) ◽  
pp. 48
Author(s):  
Tamer Bahjat Sabri
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Listed Companies ◽  
Cash Flows ◽  
T Test ◽  
Financial Statement ◽  
S Model

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

Corporate cash flow and dividends smoothing: a panel data analysis at Bursa Malaysia

2015 ◽  
Vol 13 (1) ◽  
pp. 2-19 ◽  
Author(s):  
Apedzan Emmanuel Kighir ◽  
Normah Haji Omar ◽  
Norhayati Mohamed
Keyword(s):  
Panel Data ◽  
Cash Flow ◽  
Panel Data Analysis ◽  
Generalized Method Of Moments ◽  
Cash Flows ◽  
Payout Policy ◽  
Free Cash Flow ◽  
Content Type ◽  
Financial Firms ◽  
The Impact

Purpose – The purpose of this paper is to contribute to the debate and find out the impact of cash flow on changes in dividend payout decisions among non-financial firms quoted at Bursa Malaysia as compared to earnings. There has been renewed debate in recent finance and accounting literature concerning the key determinants of changes in dividends payout policy decisions in some jurisdictions. The conclusion in some is that firms base their dividend decisions on cash flows rather than published earnings. Design/methodology/approach – The research made use of panel data from 1999 to 2012 at Bursa Malaysia, using generalized method of moments as the main method of analysis. Findings – The research finds that Malaysia non-financial firms consider current earnings more important than current cash flow while making dividends payout decisions, and prior year cash flows are considered more important in dividends decisions than prior year earnings. We also found support for Jensen (1986) in Malaysia on agency theory, that managers of firms pay dividends from free cash flow to reduce agency conflicts. Practical implications – The research concludes that Malaysian non-financial firms use current earnings and less of current cash flow in making changes in dividends policy. The policy implication is that current earnings are dividends smoothing agents, and the more they are considered in dividends payout decisions, the less of dividends smoothing. Social implications – If dividends smoothing is encouraged, it could lead to dividends-based earnings management. Originality/value – The research is our novel contribution of assisting investors and government in making informed decisions regarding dividends policy in Malaysia.

Do donors respond to discretionary accounting information consolidation?

2018 ◽  
Vol 30 (1) ◽  
pp. 16-39
Author(s):  
Benedikt Quosigk ◽  
Dana A. Forgione
Keyword(s):  
Charitable Giving ◽  
Accounting Information ◽  
Performance Measure ◽  
Financial Accounting ◽  
Financial Statement ◽  
Financial Accounting Standards Board ◽  
Content Type ◽  
Segment Reporting ◽  
Allocation Decisions ◽  
Practical Implications

Purpose The purpose of this paper is to investigate donor responses to discretionary accounting information consolidation. Nonprofit (NP) financial statement consolidation discretion significantly impacts program ratio reporting, the primary NP performance measure. Stakeholders are misled to allocate limited resources inefficiently. While some NPs file group Internal Revenue Service (IRS) Form 990 returns with their affiliates, effectively providing consolidated statements, others choose to file independently of their affiliates. Design/methodology/approach The authors use OLS regression analysis and panel data for 5,697 NP-year observations for the period 2009-2011 retrieved from the National Center for Charitable Statistics Form 990 database. Findings The authors find evidence that consolidation discretion substantially impacts donor decisions. NP managers have incentive to utilize consolidation discretion to influence charitable giving. Practical implications The authors urge the IRS and the Financial Accounting Standards Board to reconsider the consolidation guidance for NP organizations, to develop performance measures beyond the widely used program ratio, and to require program ratio segment reporting to allow for better comparability among NPs irrespective of consolidation status. Further, the authors caution stakeholders to consider supporting organization transactions in their resource allocation decisions. Originality/value The authors are the first to use NP supporting organization information to investigate consolidation discretion and its impact on donor responses.

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