Does the Ability of Operating Cash Flows to Measure Firm Performance Improve during Periods of Financial Distress?

2016 ◽  
Vol 31 (1) ◽  
pp. 23-35 ◽  
Author(s):  
Jong Eun Lee ◽  
Robson Glasscock ◽  
Myung Seok Park
Keyword(s):  
Firm Performance ◽  
Stock Returns ◽  
Shapley Value ◽  
Financial Distress ◽  
Cash Flows ◽  
Data Availability ◽  
Earnings Information ◽  
Operating Cash Flows ◽  
The Shapley Value ◽  
Jel Classifications

SYNOPSIS This study examines whether the associations between stock returns and earnings, and stock returns and cash flows from operations (OCF), vary during periods of firm-specific financial distress. We find that a firm's stock returns are more strongly associated with its OCF than its earnings when the firm is in financial distress. In a regression of stock returns on both OCF and earnings, and interactions of these two variables with an indicator for financial distress, the Shapley value, which measures contribution to the regression R2, is higher for the interaction of OCF with distress than for the interaction of earnings with distress. We also find that the strength of the observed return-OCF relation increases in a market-wide crisis. These findings support the view that investors, in times of firm distress, place significantly more weight on OCF information than on earnings information. JEL Classifications: G01; G10; M41. Data Availability: Data used in this study are available from public sources identified in the study.

Revisiting the (Mis)Pricing of Accruals

2019 ◽  
Vol 4 (1) ◽  
pp. 141-156
Author(s):  
Bradley Lail ◽  
Robert C. Lipe ◽  
Han S. Yi
Keyword(s):  
Stock Returns ◽  
Null Hypothesis ◽  
Statistical Tests ◽  
Cash Flows ◽  
Data Availability ◽  
Investor Behavior ◽  
Reliability Measures ◽  
Accrual Anomaly ◽  
Earnings Components ◽  
Jel Classifications

Our paper examines inconsistent conclusions regarding the accrual anomaly and demonstrates the importance of aligning regression specifications with hypotheses. Richardson, Sloan, Soliman, and Tuna (2005) conclude that accruals are mispriced and the mispricing seems to increase as accrual reliability decreases. Barone and Magilke (2009) and Ball, Gerakos, Linnainmaa, and Nikolaev (2016) conclude that cash flows rather than accruals are mispriced. We show that the divergent conclusions come from misalignment between the null hypothesis and regression specification in Richardson et al. (2005) . In addition, analysis of the contemporaneous relations between stock returns and components of earnings supports an initial underreaction to cash flows by investors. We fail to detect links between the reliability measures in Richardson et al. (2005) and investor behavior once we align the statistical tests with the null hypothesis. Our reexamination of prior findings benefits accounting academics, standard setters, and others interested in how investors use earnings components. JEL Classifications: M41. Data Availability: All data used in this study are publicly available from the sources identified in the text.

Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under U.S. GAAP and IFRS

2017 ◽  
Vol 93 (1) ◽  
pp. 187-211 ◽  
Author(s):  
Elizabeth A. Gordon ◽  
Hsiao-Tang Hsu
Keyword(s):  
Predictive Value ◽  
Cash Flows ◽  
Negative Association ◽  
Data Availability ◽  
Economic Factors ◽  
Negatively Associated ◽  
Operating Cash Flows ◽  
Reporting Incentives ◽  
Asset Impairments ◽  
Jel Classifications

ABSTRACT This paper investigates the predictive value of tangible long-lived asset impairments for changes in future operating cash flows under U.S. GAAP and IFRS. We find that impairments reported under IFRS are negatively associated with changes in future operating cash flows, whereas those under U.S. GAAP, on average, are not. We investigate whether differences in the predictive value are attributable to differences in recognition or measurement, providing evidence suggesting that impairment recognition under U.S. GAAP is delayed. Evidence also suggests that the value-in-use measurement attribute, allowed under IFRS, does not induce under-impairing as IFRS and U.S. GAAP impairments are similarly related to future impairments. The main result of a negative association under IFRS, but not U.S. GAAP, holds after considering future impairments to control for measurement differences, macro-economic factors, and firm reporting incentives. Further, impairment losses under IFRS are more predictive in high-enforcement countries. JEL Classifications: D78; F02; M16; M41; G38. Data Availability: Data used are available from sources identified in the paper.

Incentives to Inflate Reported Cash from Operations Using Classification and Timing

2011 ◽  
Vol 87 (1) ◽  
pp. 1-33 ◽  
Author(s):  
Lian Fen Lee
Keyword(s):  
Stock Returns ◽  
Financial Distress ◽  
Credit Rating ◽  
Cash Flows ◽  
Data Availability ◽  
Firm Characteristics ◽  
Generally Accepted Accounting Principles ◽  
Cash Flow Forecasts ◽  
Statement Of Cash Flows ◽  
Investment Grade

ABSTRACT This study examines when firms inflate reported cash from operations in the statement of cash flows (CFO) and the mechanisms through which firms manage CFO. CFO management is distinct from earnings management. Unlike the manipulation of accruals, firms cannot manage CFO with biased estimates, but must resort to classification and timing. I identify four firm characteristics associated with incentives to inflate reported CFO: (1) financial distress, (2) a long-term credit rating near the investment/non-investment grade cutoff, (3) the existence of analyst cash flow forecasts, and (4) higher associations between stock returns and CFO. Results indicate that, even after controlling for the level of earnings, firms upward manage reported CFO when the incentives to do so are particularly high. Specifically, firms manage CFO by shifting items between th estatement of cash flows categories both within and outside the boundaries of generally accepted accounting principles (GAAP), and by timing certain transactions such as delaying payments to suppliers or accelerating collections from customers. Data Availability: Data are available from public sources identified in the study.

CEO Turnover, Financial Distress, and Contractual Innovations

2013 ◽  
Vol 89 (3) ◽  
pp. 959-990 ◽  
Author(s):  
John Harry Evans ◽  
Shuqing Luo ◽  
Nandu J. Nagarajan
Keyword(s):  
Labor Market ◽  
Firm Performance ◽  
Financial Distress ◽  
Bargaining Power ◽  
Data Availability ◽  
Specific Knowledge ◽  
Ceo Incentives ◽  
Distressed Firms ◽  
Incentive Problems ◽  
Jel Classifications

ABSTRACT The design of CEO incentives is particularly important for firms in financial distress. We compare the resolution of CEO incentive problems in distressed firms between the 1980s versus the 1990s, focusing on how changes in contractual provisions, as well as in the executive labor market, resulted in a shift to a new equilibrium. Our analyses provide evidence that the increased bargaining power of creditors, together with changes in the use of contractual provisions in the 1990s, enabled creditors to more effectively retain highly skilled CEOs with firm-specific knowledge and provide them with incentives to improve firm performance. Data Availability: Data used in this study are available from public sources identified in the article. JEL Classifications: G33; G34; M46.

scholarly journals PENGARUH OPERATING CAPACITY, SALES GROWTH DAN ARUS KAS OPERASI TERHADAP FINANCIAL DISTRESS

2019 ◽  
Vol 5 (1) ◽  
Author(s):  
Annisa Livia Ramadhani ◽  
Khairun Nisa
Keyword(s):  
Logistic Regression ◽  
Regression Analysis ◽  
Financial Distress ◽  
Agricultural Sector ◽  
Stock Exchange ◽  
Sampling Technique ◽  
Cash Flows ◽  
Sales Growth ◽  
Operating Capacity ◽  
Operating Cash Flows

This study aims to determine how the influence of operating capacity, sales growth and operating cash flows on financial distress. The population in this study israll agricultural sector companies listed on the Indonesia Stock Exchange (IDX) in 2013-2017. The sampling technique in this study used purposive sampling which produced 8 samples in a period of 5 years, namely as many as 40 units of data samples. The analytical method used is logistic �regression analysis which is processed. using SPSS Version 25. Based on the results of this study, it was found that simultaneous operating capacity, sales growth and operating cash flows influence the occurrence of financial distress. Then partially, operating capacity and sales growth have no effect on the occurrence of financial distress, while operating cash flows have a positive and significant effect on the occurrence of financial distress.�Keyword : Financial Distress, Operating capacity, Sales growth, Operation cash flow.

Clawbacks and Earnings Management

2018 ◽  
Vol 31 (3) ◽  
pp. 129-151 ◽  
Author(s):  
Carolyn B. Levine ◽  
Michael J. Smith
Keyword(s):  
Numerical Analysis ◽  
Earnings Management ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Interim Report ◽  
Short Term ◽  
Period Model ◽  
Jel Classifications

ABSTRACT This study addresses the effect of clawbacks on earnings management (EM). In a two-period model, the manager can report truthfully or distort an interim report using either accrual or real EM. The principal can make short-term payments based on a manipulable accounting signal and long-term payments based on unmanipulable cash flows. The strength of the clawbacks determines the likelihood that the manager's compensation is reclaimed when the interim report was managed. Stronger clawback provisions may result in (1) a substitution between accrual and real earnings management, or (2) earnings management when no earnings management was optimal with weak clawbacks, and (3) lower expected profits for the principal. Numerical analysis suggests that strong clawbacks do not reduce aggregate earnings management. JEL Classifications: J33; M48; M52; G38. Data Availability: All data are simulated.

scholarly journals A comparative study of information content of cash flow, cash value added, accounting earnings, and market value added to book value of total assets in evaluating the firm performance

2017 ◽  
Vol 5 (2) ◽  
pp. 112
Author(s):  
Mohammad Delkhosh ◽  
Zahra Malek ◽  
Maryam Rahimi ◽  
Zohreh Farokhi
Keyword(s):  
Firm Performance ◽  
Information Content ◽  
Financial Reporting ◽  
Value Added ◽  
Market Value ◽  
Cash Flows ◽  
Maximum Information ◽  
Book Value ◽  
Operating Cash Flows ◽  
Market Value Added

The aim of the present study was to compare the utility of traditional accounting reporting and financial reporting for performance evaluations. Accordingly, the relationship between six ratios of net cash flows, net operating cash flows, cash value added, income after tax, income before tax, and market value added to the book value of total assets and Tobin’s Q ratio as an indicator of performance evaluation were examined. For this purpose, the information of 122 companies listed on Tehran Stock Exchange in the years 2009 to 2014 were used. Besides, linear regression and analysis of variance (ANOVA) were used to analyze the data. The results showed that except for the ratio of net cash flows to the book value of total assets, there was a significant relationship between the other five ratios. In addition, it was noted that cash value added to net operating cash flows had more information content concerning evaluating the firm performance. The results also indicated that net cash flows did not contain information content for evaluating the firm performance. However, the market value added had the maximum information to be used for evaluating the firm performance.

scholarly journals The Association between Various Earnings and Cash Flow Measures of Firm Performance and Stock Returns: some Iranian evidence

2013 ◽  
Vol 3 (1) ◽  
pp. 24 ◽  
Author(s):  
Ali Mazloom ◽  
Alireza Azarberahman ◽  
Jalal Azarberahman
Keyword(s):  
Firm Performance ◽  
Stock Returns ◽  
Cash Flow ◽  
Applied Research ◽  
Stock Exchange ◽  
Cash Flows ◽  
Company Performance ◽  
Statistical Population ◽  
Semi Empirical ◽  
Better Than

The main purpose of this research is the study of association between various measures of firm performance based on earnings and cash flows and stock returns. This research is an applied research, and its design is semi-empirical, which is done by the method of post-event (past information). The statistical population of the research includes all companies listed in Tehran Stock Exchange (TSE), and its period is nine consecutive years, from 2003 to 2011. Simple and multiple regressions are applied in order to test the hypotheses. Results of the research represent that earning based measures are more related to stock returns than cash flow based measures. Furthermore, earning based measures depict the company performance better than cash flow measures in some companies with higher accruals. But in companies with lower accruals, the company performance cannot be depicted properly neither by earning based nor cash flow based measures.

Earnings, Cash Flows, and Ex Post Intrinsic Value of Equity

2007 ◽  
Vol 82 (2) ◽  
pp. 457-481 ◽  
Author(s):  
K. R. Subramanyam ◽  
Mohan Venkatachalam
Keyword(s):  
Stock Returns ◽  
Intrinsic Value ◽  
Market Price ◽  
Cash Flows ◽  
Cost Of Equity ◽  
Operating Cash Flows ◽  
Ex Post ◽  
Reported Earnings ◽  
Future Cash Flows ◽  
Value Measure

We reexamine the relative importance of earnings and operating cash flows in equity valuation. In contrast to previous studies that use stock returns (Dechow 1994) or future operating cash flows (Barth et al. 2001), we use ex post intrinsic value of equity as the criterion for comparison. We determine ex post intrinsic value of equity by discounting future dividends over a three-year horizon and market price at the end of the horizon by industry cost of equity. The advantage of the ex post intrinsic value measure over stock returns is that it is not contaminated by the stock market's fixation on reported earnings (Sloan 1996). Also, unlike finite horizon future operating cash flows, ex post intrinsic values better reflect the magnitude, timing, and uncertainty of investors' future cash flows (SFAC No. 1, FASB 1978). Our results suggest that accrualbased earnings dominate operating cash flows as a summary indicator of ex post intrinsic value.

scholarly journals Reaksi Investor Atas Relevansi Informasi Arus Kas Dan Laba Akrual pada Laporan Keuangan Perusahaan

2021 ◽  
Vol 21 (2) ◽  
pp. 575
Author(s):  
Muhammad Imam Sundarta ◽  
Azolla Degita Azis ◽  
Anggita Citra Dewi
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Stock Exchange ◽  
Secondary Data ◽  
Cash Flows ◽  
Financial Reports ◽  
Earnings Information ◽  
Income Statement ◽  
Analysis Technique ◽  
Cash Flow Statement

This study aims to determine whether cash flows and accrual earnings affect on stock returns that contained information about investors reaction in manufacturing industries on the Indonesia Stock Exchange from the 2013-2017 period. This research is a quantitative study using secondary data in the form of financial reports. The data analysis technique used is multiple regression analysis. The results of this study indicate that the cash flow statement has no effect on stock returns, while accrual earnings have a positive effect on stock returns. This finding can be one of the additional literature in the field of financial accounting because investors see the earnings information contained in the income statement compared to the cash flow statement that is reflected in stock returns.

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