Negative operating cash flows and investment inefficiency

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chris Harris ◽  
Zhe Li
Keyword(s):  
Corporate Governance ◽  
Intangible Assets ◽  
Cash Holdings ◽  
Agency Problems ◽  
Cash Flows ◽  
Publicly Traded ◽  
Content Type ◽  
Operating Cash Flows ◽  
The Relationship ◽  
Practical Implications

PurposeThe purpose of this paper is to identify whether negative operating cash flows are related to investment inefficiency, and specifically whether they are related to subsequent overinvestment and if this relationship is driven by agency problems within the firm.Design/methodology/approachThe study conducts fixed effect regressions, testing the relationship between negative operating cash flows and the firm’s subsequent investment inefficiency. The relationship is further examined for all firms based on size, corporate governance and cash holdings – all of which are related to agency problems.FindingsThe proportion of firms reporting negative operating cash flows has been increasing over time and is positively related to subsequent investment inefficiency. This increase is explained not only by the rise in investment of intangible assets. The positive relationship is not explained by the firm size or corporate governance, but is related to cash holdings. These results are consistent across four different measures of firm investment.Practical implicationsThe percentage of publicly traded firms with negative operating cash flows has never been higher. This paper is one of the first to identify factors that may be contributing to this rise.Originality/valueThis study extends prior findings by identifying previously unexplored factors related to the rise in firms with negative operating cash flows. The rise in investment of intangible assets does not explain the increase alone. High cash holdings also influence the rise in negative operating cash flows.

Cash holdings and corporate governance: theory and contrary evidence from hotel firms

2018 ◽  
Vol 30 (10) ◽  
pp. 3117-3134 ◽  
Author(s):  
Tarik Dogru ◽  
Ercan Sirakaya-Turk
Keyword(s):  
Corporate Governance ◽  
Cash Holdings ◽  
Agency Problems ◽  
High Growth ◽  
Cash Flows ◽  
Governance Mechanisms ◽  
Growth Opportunities ◽  
Content Type ◽  
Corporate Governance Mechanisms

Purpose The purpose of this study is to examine the extent to which the quality of corporate governance mechanisms and growth opportunities affect agency problems in hotel firms. Design/methodology/approach The effects of cash flows on investments and cash holdings were analyzed using three-stage least square analysis to determine the extent to which agency problems are due to the quality of corporate governance in hotel firms. Findings The findings showed that the effects of cash flows on investments and cash holdings were greater in well-governed hotel firms than in poorly governed hotel firms. These effects were also greater in low-growth hotel firms than in high-growth hotel firms. However, the results from a concurrent examination of the quality of corporate governance and growth opportunities showed that poorly governed hotel firms with low-growth opportunities are exposed to agency problems. Research limitations/implications These results suggest that neither corporate governance mechanisms nor growth opportunities alone indicate agency problems. Theoretical implications are discussed within the realms of free cash flow theory and growth hypothesis. Practical implications High-growth hotel firms should retain all of their cash and cash flows to undertake value-increasing projects when they become available. Shareholders’ wealth is more likely to be maximized in high-growth firms regardless of the quality of corporate governance. Originality/value Although various aspects of corporate governance have been investigated in hospitality literature, previous studies did not examine the concurrent effects of corporate governance and growth opportunities on agency problems.

scholarly journals Stewardship theory: is board accountability necessary?

2017 ◽  
Vol 59 (6) ◽  
pp. 1292-1314 ◽  
Author(s):  
Andrew Keay
Keyword(s):  
Corporate Governance ◽  
Agency Theory ◽  
Design Methodology ◽  
Agency Problems ◽  
Stewardship Theory ◽  
Content Type ◽  
General Terms ◽  
Practical Implications

Purpose The purpose of the paper is to demonstrate that notwithstanding the fact that stewardship theory embraces things like trust of directors, their professionalism, loyalty and willingness to be concerned for the interests of others, as well as rejecting the foundations of classic agency problems that are asserted by agency theory, board accountability is as relevant to stewardship theory as it is to agency theory. Design/methodology/approach The paper applies the theory underlying board accountability in corporate governance, which is so often applied both in the corporate governance literature and in practice with agency theory in mind, to stewardship theory. Findings While the idea of accountability of boards is generally associated with an explanation and conceptualisation of the role and behaviour of directors as agents within classic agency theory, the paper demonstrates that board accountability is a necessary part of board life even if the role of directors is explained and conceptualised in terms of stewardship theory. Practical implications The paper suggests some accountability mechanisms that might be employed in a stewardship approach. Originality/value While many authors have talked in general terms about board accountability and its importance, this is the first paper that has engaged in a substantial study that links board accountability directly with stewardship theory, and to establish that accountability is necessary.

Intangible assets and trade credit policy

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sarah Taylor Hartsema ◽  
Chris Harris ◽  
Zhe Li ◽  
Thibaut G. Morillon
Keyword(s):  
Trade Credit ◽  
Intangible Assets ◽  
Negative Relationship ◽  
Intangible Asset ◽  
Financial Constraint ◽  
Sales Growth ◽  
Credit Policy ◽  
Content Type ◽  
The Relationship ◽  
Practical Implications

PurposeThe purpose of this paper is to identify whether the rise in intangible asset investment is related to trade credit investment and whether this relationship is driven by financial constraint and other firm factors.Design/methodology/approachThe study conducts fixed effect regressions testing the relationship between trade credit investment and intangible asset levels. The relationship is further examined for all firms based on product type, financial constraint and sales growth.FindingsThere is a negative relationship between investment in trade credit and the level of intangible assets as a proportion of total assets. This negative relationship is largely explained by firms in industries that traditionally utilize more trade credit, firms with financial constraints and firms with low sales growth.Practical implicationsThe level of investment in intangible assets continues to rise, while investment in trade credit is declining. This paper is the first to identify whether these trends could be related and to provide some explanation why.Originality/valueThis study is the first to link investment in trade credit with investment in intangible assets. There is a negative relationship that is most pronounced for firms that typically offer more trade credit, that are experiencing financial constraint and that are experiencing low growth.

scholarly journals Impact of governance structures on environmental disclosures in the Middle East and Africa

2020 ◽  
Vol 20 (4) ◽  
pp. 739-763 ◽  
Author(s):  
Erhan Kilincarslan ◽  
Mohamed H. Elmagrhi ◽  
Zezeng Li
Keyword(s):  
Corporate Governance ◽  
Middle East ◽  
Gender Diversity ◽  
Governance Structures ◽  
Environmental Disclosure ◽  
Content Type ◽  
Environmental Disclosures ◽  
The Impact ◽  
The Relationship ◽  
Practical Implications

Purpose This study aims to investigate the impact of corporate governance structures on environmental disclosure practices in the Middle East and Africa (MEA). Design/methodology/approach The research model uses a panel data set of 121 publicly listed (non-financial and non-utility) firms from 11 MEA countries over the period 2010-2017, uses alternative dependent variables and regression techniques and is applied to various sub-groups to improve robustness. Findings The empirical results strongly indicate that MEA firms with high governance disclosures tend to have better environmental disclosure practices. The board characteristics of gender diversity, size, CEO/chairperson duality and audit committee size impact positively on MEA firms’ voluntary environmental disclosures, whereas board independence has a negative influence. Research limitations/implications This study advances research on the relationship between corporate governance structures and environmental disclosure practices in MEA countries, but is limited to firms for which data are available from Bloomberg. Practical implications The results have important practical implications for MEA policymakers and regulators. The positive impact of board gender diversity on firms’ environmental disclosures, policy reforms should aim to increase female directors. MEA corporations aiming to be more environmentally friendly should recruit women to top managerial positions. Originality/value This is thought to be the first study to provide insights from the efficiency and legitimation perspectives of neo-institutional theory to explain the relationship between MEA firms’ internal governance structures and environmental disclosures.

Finance, corporate value and credit market freedom in overinvesting US firms

2020 ◽  
Vol 20 (6) ◽  
pp. 1053-1072
Author(s):  
Alfonsina Iona ◽  
Marco Alberto De Benedetto ◽  
Dawit Zerihun Assefa ◽  
Michele Limosani
Keyword(s):  
Corporate Finance ◽  
Firm Value ◽  
Cash Holdings ◽  
Agency Problems ◽  
Credit Market ◽  
The State ◽  
Corporate Value ◽  
Content Type ◽  
External Finance ◽  
The Relationship

Purpose Using a sample of US firms more likely to be affected by agency problems, the purpose of this paper is to investigate the relationship between corporate value and financial policies and to study whether credit market freedom (CMF) affects this relationship. Design/methodology/approach The authors identify a sub-sample of non-financial US firms potentially affected by agency problems using a joint criterion of over-investment and high cash-holdings. A generalized method of moment econometric framework is then used to estimate the impact of cash-holdings and leverage policies on firm value for this sub-sample. This exercise is also performed by taking into account the level of CMF of the state where the firm operates. Findings The results show that the relationship between cash-holdings – or leverage – and firm value is “U-shaped.” In addition, when the authors focus on the role played by the level of CMF, the authors find a number of interesting facts: CMF facilitates the firms’ access to external finance, thereby relaxing the need of internal funds for investing; the relationship between cash-holdings and firm value is “U-shaped” only in states enjoying high levels of CMF; the probability of observing firms more likely to be affected by agency problems is higher in states with high levels of CMF. Research limitations/implications The empirical findings provide important insights to policymakers, shareholders and practitioners. To policymakers, the results suggest that providing institutional environments with greater CMF can enhance the firm access to external finance, the level of corporate investment and the economic growth. To shareholders, the findings highlight that the conflicts of interest between managers and shareholders may be more severe in states with higher CMF; therefore, adequate financing policies and corporate governance mechanisms must be used to mitigate these conflicts and maximize the firm value. Finally, to practitioners, the evidence suggests that, in valuing a firm, they must take into consideration whether the economic environment provides managers with more freedom to stockpile cash and invest sub-optimally. Originality/value The paper contributes to the corporate finance and governance literature in two respects. First, it provides new evidence on the shape of the relationship between cash holdings and firm value for firms affected by empire-building managers. Second, at the best of the knowledge, it is the first corporate finance study, which analyzes the role played by the CMF at the state level on the capital structure and the level of investment of the firms.

scholarly journals Relationship between cash holdings and expected equity returns: evidence from Pacific alliance countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Judith Vergara Garavito ◽  
Sergio J. Chión
Keyword(s):  
Multivariate Regression ◽  
Design Methodology ◽  
Cash Holdings ◽  
Statistical Technique ◽  
Equity Returns ◽  
Content Type ◽  
Risk Return ◽  
Asset Pricing Models ◽  
The Relationship ◽  
Practical Implications

Purpose This paper aims to examine the relationship between cash holdings (CH) and expected equity return in a sample of firms of Pacific alliance countries. Design/methodology/approach This paper constructed a panel of Pacific alliance firms for the period ranging from 2010 to 2016. This paper estimated different specification models using multivariate regression, and the statistical technique used to validate the hypothesis was panel data. Findings Results showed that there is a positive relationship between CH and expected equity return (r). The relationship between CH and systematic risk (ß) was estimated and this paper found a positive and statistically significant association. Findings suggest that corporate liquidity contains underlying information that contributes to explain the expected equity return, which, if ignored, can produce quite misleading results. Originality/value The results of this study have both academic and practical implications. First, the findings of the research contribute to a better understanding of the asset pricing models in emerging countries. On the other hand, the results obtained in this study can serve shareholders to make better estimations of the expected equity return, so investors can improve the risk-return trade-off due to the model allow a better estimation of the risk-return relation.

Sales order backlog and corporate cash holdings

2020 ◽  
Vol 28 (3) ◽  
pp. 351-371
Author(s):  
Kailing Deng ◽  
Linda Nichols ◽  
Li Sun
Keyword(s):  
Corporate Governance ◽  
Performance Indicator ◽  
Cash Holdings ◽  
Content Type ◽  
Precautionary Motive ◽  
Research Questions ◽  
The Impact ◽  
The Relationship ◽  
Corporate Cash Holdings

PurposeWe examine the impact of sales order backlog (an important leading performance indicator) on corporate cash holdings and the role of corporate governance in the relation between sales order backlog and cash holdings.Design/methodology/approachWe use the regression analysis to examine our research questions.FindingsConsistent with the agency motive and the precautionary motive of cash holdings, we document a significant negative relation between order backlog and cash, suggesting that firms with higher order backlog hold less cash. We further examine and find that the relationship between order backlog and cash becomes stronger for firms with stronger corporate governance, highlighting the role of governance in determining the level of corporate cash holdings.Originality/valueOur study contributes to the accounting literature on sales order backlog and the finance literature on corporate cash holdings. In particular, our study contributes to developing a more comprehensive understanding of the sales order backlog because it is still an under-researched area in accounting. To the best of our knowledge, this study is perhaps the first empirical study that examines the direct link between order backlog and cash.

scholarly journals Intervening Effect of Cash Holdings in the Relationship Between Financial Performance and Dividend Policy

2017 ◽  
Vol 13 (28) ◽  
pp. 264
Author(s):  
Geoffrey Mbuva Kimunduu ◽  
Mirie Mwangi ◽  
Erasmus Kaijage ◽  
Duncan Elly Ochieng
Keyword(s):  
Financial Performance ◽  
Dividend Policy ◽  
Cash Holdings ◽  
Sampling Technique ◽  
Cash Flows ◽  
Operating Cash Flows ◽  
Assessment Approach ◽  
Research Findings ◽  
Regulatory Bodies ◽  
The Relationship

Many studies on relationship between financial performance and dividend policy have resulted to controversial outcome with few studies questioning the intervening effect of cash holdings. The purpose of this study was to evaluate the effect of cash holdings on the relationship between financial performance and dividend policy. The study applied positivism research philosophy and descriptive causal research design. The study was anchored on hypothetical view that the relationship between financial performance and dividend policy of firms listed at the Nairobi securities exchange is not intervened by cash holdings which was tested against a sample size of 31 firms listed at the Nairobi securities exchange selected using purposive sampling technique. The research findings were as follows: There was a significant direct association between operating cash flows and dividend policy which was intervened by cash holdings. In general it was concluded that the link between financial performance and dividend policy of firms listed at the Nairobi securities exchange was significant. The study outcome augment existing knowledge on financial performance and dividend policy for it is evident that firms with ability to generate income directly influence dividend payout ratio and therefore, top management should enhance financial performance and not dividend policy which is irrelevant. Cash holdings intervenes this relationship hence the level of cash balances maintained by the firm explain more on the reason why some firms pay more dividend on increase of profitability levels while others does not. Regulatory bodies such as Capital Market Authority and Centre for Corporate Governance use these research findings to improve their financial viability assessment approach of firms listed at the Nairobi securities exchange.

CEO inside debt and the value of excess cash

2018 ◽  
Vol 19 (2) ◽  
pp. 225-244 ◽  
Author(s):  
Mohamed Belkhir ◽  
Sabri Boubaker ◽  
Kaouther Chebbi
Keyword(s):  
Firm Value ◽  
Cash Holdings ◽  
Future Research ◽  
Content Type ◽  
Marginal Value ◽  
Inside Debt ◽  
Excess Cash ◽  
Fama And French ◽  
The Relationship ◽  
Practical Implications

PurposeThe purpose of this paper is to investigate the relationship between corporate debt-like compensation and the value of excess cash holdings.Design/methodology/approachThe sample comprises 876 US firms covered by ExecuComp over the period 2006-2013. The authors apply the valuation regression of Fama and French (1998) to examine the marginal value of excess cash as a function of CEO inside debt holdings.FindingsThis paper proposes one hypothesis. The results constitute evidence that the value of excess cash to shareholders declines as CEO inside debt increases. More interestingly, excess cash holdings contribute less to firm value when shareholders expect their value to be destroyed due to managers’ conservative behavior.Research limitations/implicationsThe sample comprises only US firms, owing to a lack of firms data from other countries. It would be interesting to conduct future research on an international sample.Practical implicationsThis paper contributes to a deeper understanding of investor valuation of excess cash in the presence of CEO inside debt. The findings complement previous studies on US firms by confirming the existence of a relationship between the agency costs of debt and firm policy decisions.Originality/valueThis work is, to the best of the authors’ knowledge, the first to examine the relationship between debt-like compensation and excess cash valuation, and it supports the view that the conflict between shareholders and debtholders largely affects firm cash policy, and hence, cash valuation.

Governance structures, cash holdings and firm value on the Ghana Stock Exchange

2018 ◽  
Vol 18 (4) ◽  
pp. 671-685 ◽  
Author(s):  
Disraeli Asante-Darko ◽  
Bright Adu Bonsu ◽  
Samuel Famiyeh ◽  
Amoako Kwarteng ◽  
Yayra Goka
Keyword(s):  
Corporate Governance ◽  
Firm Value ◽  
Boards Of Directors ◽  
Stock Exchange ◽  
Cash Holdings ◽  
Debt Financing ◽  
Content Type ◽  
Governance Practices ◽  
Ghana Stock Exchange ◽  
The Relationship

Purpose There is an existing relationship among shareholders, boards of directors and management of companies. Corporate governance practices of companies are expected to ensure that this relationship maximises the wealth of shareholders. Differences exist among corporate governance of companies listed on the Ghana Stock Exchange. Companies, for purposes of liquidity, hold cash, but cash holdings also add to the cost of financing, according to working capital theories. The study, thus, sought to examine the relationship between corporate governance practices, ownership structure, cash holdings and firm value. Design/methodology/approach The study deployed the seemingly unrelated regression to reduce the problem of multicollinearity resulting from the strong relationship between cash reserves and some control variables. Findings The study found no significant relationship between board size and firm value. Similar findings were also made on the relationship between proportion of non-executive directors on the board and firm value. However, firms audited by the big four audit firms are valued higher by the capital market. Cash holdings of firms negatively affect performance, and this is statistically significant. A positive relationship arises between a firm’s cash holdings and its value as a result of debt financing, even though this is not significant. Originality/value The study is the first of its kind that deploys Tobin’s Q as a measure of firms’ value to reflect investors’ valuation of firms in Ghana. The study is also the first of its kind to test the interactive effect of debt financing and cash holdings on firm value in Ghana.

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