History Doesn't Repeat, But It Rhymes.- Cash Flow Risk and Expected Returns

We examine whether sensitivities to cash flow and discount rate risk in down markets explain the investment effect, in which low-investment stocks earn higher expected returns than high-investment stocks. We show how productivity and financing constraints asymmetrically impact the systematic risk of low-investment and high-investment firms, conditional on market state. Our evidence is consistent with both productivity constraints and financing constraints as explanations for the investment effect, but, contrary to expectations, more when prices are rising than falling.

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Financing constraints, cash-flow risk, and corporate investment

Journal of Corporate Finance ◽

10.1016/j.jcorpfin.2011.09.002 ◽

2011 ◽

Vol 17 (5) ◽

pp. 1496-1509 ◽

Cited By ~ 21

Author(s):

Stefan Hirth ◽

Marc Viswanatha

Keyword(s):

Cash Flow ◽

Corporate Investment ◽

Financing Constraints ◽

Cash Flow Risk

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The Effects of Accruals Quality on Audit Hours and Audit Fees

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x15611323 ◽

2015 ◽

Vol 32 (3) ◽

pp. 372-400 ◽

Cited By ~ 11

Author(s):

Myojung Cho ◽

Eunsun Ki ◽

Soo Young Kwon

Keyword(s):

Cash Flow ◽

Negative Relationship ◽

Audit Fees ◽

Discretionary Accruals ◽

Cash Flows ◽

Accounting Earnings ◽

Accruals Quality ◽

Cash Flow Risk

We investigate whether auditors take into account accruals quality, a proxy for the cash flow risk associated with earnings, by adjusting audit hours and audit fees. Accruals quality tells investors about the mapping of accounting earnings into cash flows. Poor accruals quality weakens this mapping and thus increases this cash flow risk. We find a negative relationship between accruals quality and audit hours/fees, indicating that auditors increase their audit efforts by modifying audit procedures and substantive tests and charge higher fees for the increased cash flow risk. In addition, we find that both innate accruals quality and discretionary accruals quality are negatively related to audit hours and fees but that innate accruals quality is more likely to influence audit hours and fees than discretionary accruals quality. The results indicate that auditors incorporate the cash flow risk associated with accruals quality but that their response varies according to the source of accruals quality.

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