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1 – 10 of over 12000Georgios Papanastasopoulos, Dimitrios Thomakos and Tao Wang
The purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free…
Abstract
Purpose
The purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free cash flow yield (free cash flows scaled by price).
Design/methodology/approach
The paper utilizes portfolio‐level tests and cross‐sectional regressions.
Findings
In line with the literature on contrarian portfolios, this paper finds that firms with low (high) free cash flow yield are experiencing low (high) returns. However, only when an investor buys (sells) stocks of firms with high (low) free cash flow yield that distribute (raise) capital, his zero‐cost portfolio is significant. These findings are robust, irrespective of the financing vehicle (equity or debt). Overall, their evidence suggests that distinctions between the value/growth anomaly and the external financing anomaly partially disappear, if one is willing to employ free cash flow yield as a proxy of the former anomaly.
Originality/value
The paper enhances one's understanding of the relation between asset pricing anomalies.
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This paper reports an attempt to design a free cash flow version of the cash flow statement. In specific, the paper relates the comprehensive income concept to the definition of…
Abstract
Purpose
This paper reports an attempt to design a free cash flow version of the cash flow statement. In specific, the paper relates the comprehensive income concept to the definition of free cash flows and shows how free cash flows and residual income can be calculated from the cash flow statement.
Design/methodology/approach
This paper exhibits how this different version of the cash flow statement can be reported by illustrating the differences with the form of the statement required by the regulatory accounting bodies.
Findings
This paper shows that the cash flows resulting from operating and investing activities are exactly equal to the cash flows received by debt and equity holders (financing activities) by using a simple definition of a company's free cash flow.
Practical implications
The method used requires a different version of a cash flow statement in which all financing related cash flows, such as interest expense is not included in the cash flow from operating activities. This version of the cash flow statement can be used in order to evaluate and appreciate financial policy formulation.
Originality/value
The paper provides to the shareholders and all the parties who are interested in firm and its operation (managers, lenders etc) with information about the company's ability to distribute dividends, to issue new debt and in general the company's ability to meet its obligations.
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Keywords
The aim of this paper is to answer the question: Do discounted cash flows valuation methods provide always the same value?
Abstract
Purpose
The aim of this paper is to answer the question: Do discounted cash flows valuation methods provide always the same value?
Design/methodology/approach
This paper is a summarized compendium of ten methods including: free cash flow; equity cash flow; capital cash flow; adjusted present value; business's risk‐adjusted free cash flow and equity cash flow; risk‐free rate‐adjusted free cash flow and equity cash flow; economic profit; and economic value added.
Findings
All ten methods always give the same value.
Research limitations/implications
The disagreements among the various theories of firm valuation arise from the calculation of the value of the tax shields (VTS). The paper analyses nine different theories.
Originality/value
The paper is an analysis of ten methods of company valuation using discounted cash flows and nine different theories about the VTS.
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Emita W. Astami, Rusmin Rusmin, Bambang Hartadi and John Evans
The purpose of this paper is to examine the effect of culture and audit quality on managers’ decisions regarding accounting accruals. It focuses on companies experiencing…
Abstract
Purpose
The purpose of this paper is to examine the effect of culture and audit quality on managers’ decisions regarding accounting accruals. It focuses on companies experiencing excessive free cash flow, as these companies have been associated with an agency problem.
Design/methodology/approach
This study measures the magnitude of discretionary accruals as a proxy for earnings management using the cross-sectional modified Jones model. Excessive free cash flow is scrutinized by the method used by Chung et al. (2005). Listed companies in nine countries in the Asia-Pacific region are represented in this study. The statistical analyses are used to examine the influence of cultural aspect, the role of external monitoring by high-quality auditors and the earnings management practice in the companies with excessive free-cash-flow.
Findings
The empirical results presented in this paper provide support for the proposition that managers of companies with excessive free-cash-flow will make investment decisions that are not always in the best interest of the shareholders and use accounting discretion to increase reported earnings. This study provides empirical evidence that these companies have been associated with an agency problem and the role of external auditor persists in a setting, where cultural differences prevail in across countries.
Practical implications
In cross-border trade and investment, the findings provide the opportunity to exploit a setting, where cultural differences prevail, whereas other potentially influential variables, including the role of external monitoring by high-quality auditors, are relatively constant across countries.
Originality/value
Previous studies (Leuz et al., 2003; and Enomoto et al., 2015) examine factors influencing earnings management internationally have concentrated on legal institutions and investor protection. Han et al. (2010) completed a cross-country study on the effects of national culture on earnings management. This study focuses on companies across countries experiencing with excessive free cash flow and examines the cultural aspect and the effectiveness of external monitoring by high-quality auditors operating in different countries in mitigating managerial opportunism.
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Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that financial…
Abstract
Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.
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Redhwan Ahmed AL-Dhamari and Ku Nor Izah Ku Ismail
Existing studies on corporate governance mainly focus on how a strong governance system enhances the valuation of firms with cash holding or free cash flow agency problem. The…
Abstract
Purpose
Existing studies on corporate governance mainly focus on how a strong governance system enhances the valuation of firms with cash holding or free cash flow agency problem. The aims of this paper are threefold. First, it investigates the impact of surplus free cash flows (SFCF) on earnings predictability. Second, it investigates whether corporate governance variables moderate the negative impact of SFCF on earnings predictability. Finally, this study examines whether the ability of corporate governance to mitigate SFCF and improve the predictive value of earnings varies between large and small firms.
Design/methodology/approach
This paper uses heteroskedasticity-corrected least square regressions upon a sample of Malaysian listed firms.
Findings
This paper finds that firms with high SFCF experience less earnings predictability. It also indicates that earnings of firms with high SFCF are more predictable when institutional investors hold a large stake of shares and when a chairperson is independent. Finally, this paper reveals that the role of institutional and managerial ownership in mitigating agency conflict of free cash flow and improving earnings predictability is more prominent in larger firms. This study implies that investors still have reservations about the ability of boards to enhance earnings numbers in Malaysia, although efforts were taken to reform the corporate governance mechanisms following the Asian financial crisis.
Originality/value
This research is considered as the first attempt to examine the relationships between SFCF, corporate governance, firm size, and earnings predictability in a developing county such as Malaysia. The findings of this paper serve as a wake-up call to policy makers to evaluate the importance of governance structure in enhancing earnings predictability in emerging economies.
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Stewart Jones and Rohit Sharma
Outlines the rapid growth of “new economy” companies in Australia and compares their levels of earnings management with “old economy” firms, using data on all Australian listed…
Abstract
Outlines the rapid growth of “new economy” companies in Australia and compares their levels of earnings management with “old economy” firms, using data on all Australian listed companies. Reviews the relevant research, explains the methodology and presents the results. Shows that the old economy firms do engage in significant earnings management which is positively associated with leverage and free cash flow levels but, surprisingly, that this is far less evident in the new economic sector. Considers consistency with other research, the underlying reasons for the findings (including regulatory constraints) and opportunities for further research.
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This paper presents evidence that the valuation consequences of targeted share repurchase announcements are positively related to the size of the firms' pre‐repur‐chase free cash…
Abstract
This paper presents evidence that the valuation consequences of targeted share repurchase announcements are positively related to the size of the firms' pre‐repur‐chase free cash flows and to the firms' pre‐repurchase build‐up of liquid assets. The paper further reports that the level of liquid assets declines permanently following the share repurchases. The results suggest that a share repurchase is a viable means to cut down surplus cash and that such decision can increase shareholder wealth by reducing agency costs of free cash flows.
Shah Md Taha Islam, Ratan Ghosh and Asia Khatun
The purpose of this study is to investigate whether financial resource allocation decisions for corporate social responsibility (CSR) depends on slack resources and free cash flow.
Abstract
Purpose
The purpose of this study is to investigate whether financial resource allocation decisions for corporate social responsibility (CSR) depends on slack resources and free cash flow.
Design/methodology/approach
The study's sample consists of 202 company-year observations from 51 financial institutions over the period 2015–2019. The authors collected CSR data from CSR review reports published by the Central Bank (Bangladesh Bank). The financial and governance data are collected from corporate annual reports and year-end review reports published by the Dhaka Stock Exchange. This study uses both the random-effect and generalized estimating equation models to test the hypotheses.
Findings
The authors establish two key findings consistent with the predictions of slack resource theory and free cash flow theory. First, the authors find a significant and positive relationship between slack resources and CSR expenditure. This result also supports the traditional thinking about corporate giving – that doing well enables doing good. Second, the author show that increases in free cash flow are associated with increases in CSR expenditure. This indicates the presence of agency problems between managers and shareholders regarding CSR expenditure.
Originality/value
This study is the first to show the positive impacts of slack resources and free cash flow on CSR expenditure in an emerging economy characterized by both capital constraints and high salience of CSR expenditure. The study has important implications for regulators, advocacy groups, shareholders and analysts in emerging economies that share similar contextual characteristics.
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The primary purpose of this paper is to develop the translation formula between the required return on unlevered and levered equity for the specific case where cash flows have a…
Abstract
Purpose
The primary purpose of this paper is to develop the translation formula between the required return on unlevered and levered equity for the specific case where cash flows have a finite lifetime and the flow to debt is prespecified. The secondary purpose of this paper is to underpin the importance of the type of stochasticity of cash flows for translation formulas. A general derivation of such formulas and the discount rate in the free cash flow approach is shown.
Design/methodology/approach
The paper starts with the same assumptions that have been applied by Modigliani and Miller (1963), Miles and Ezzell (1980) and other researchers. Then the paper develops the mathematical foundations to apply a deterministic backward-iterative scheme for valuing cash flows. After stating the valuation formulas for levered and unlevered equity, debt and tax shields, the authors mathematically derive the relationship between the unlevered return and levered return on equity.
Findings
Conventional translation formulas apply to very special cases. They can generally not be used for projects with nonconstant leverage and a finite lifetime. In general, translation formulas depend on continuing values, cash flows, leverage, taxation, risk-free rate, etc. In this paper, the translation depends on the structure of the debt in addition to the well-known parameters in conventional formulas. This paper formula contains the Modigliani-Miller translation formula as a special case.
Originality/value
The authors develop a novel formula for the translation of the required return on unlevered to levered equity. With this formula, the authors offer a solution for the consistent valuation of cash flows with a limited lifetime and given debt financing.
Details