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Article
Publication date: 19 September 2023

Pamela Fae Kent, Richard Kent and Michael Killey

This study aims to provide insights into US and Australian analysts' views regarding the relative importance of disclosing the direct method (DM) or indirect method (IM) statement…

Abstract

Purpose

This study aims to provide insights into US and Australian analysts' views regarding the relative importance of disclosing the direct method (DM) or indirect method (IM) statement of cash flows and forecasting firm performance.

Design/methodology/approach

Evidence is collected from responses to 104 surveys and 52 interviews completed by US and Australian analysts from 2017 to 2022. The survey and interview questions are developed with reference to the literature.

Findings

US and Australian analysts believe that the DM format provides incremental benefits compared to the IM for (1) confirming the reliability of earnings; (2) improving earnings confidence; (3) more accurate ex ante forecasts of operating cash flow and earnings; and (4) identifying opportunistic accruals manipulation. Analysts view that DM disclosure can lower firm-level cost of equity, although US interviewees more uniformly expect lower costs of equity under DM disclosure when firms yield low earnings quality. DM disclosure is also more important during unstable economic periods, as proxied by COVID-19.

Originality/value

Limited research currently exists regarding disclosure of the DM or IM and its impact on analysts' forecasting accuracy, earnings quality, economic uncertainty and cost of equity. Previous research has relied on archival research to examine differences between the DM and IM methods and are limited by data availability. Our findings are particularly relevant to the US market with few US firms reporting the DM format.

Details

Journal of Accounting Literature, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 29 February 2024

Gerasimos Rompotis

I seek to identify whether cash flow management can affect the performance and risk of the Greek listed companies.

Abstract

Purpose

I seek to identify whether cash flow management can affect the performance and risk of the Greek listed companies.

Design/methodology/approach

This study examines the relationship of cash flow management with performance and risk, using a sample of 80 non-financial companies listed in the Athens Exchange. The study covers the period 2018–2022, and panel data analysis is applied. Both financial performance and stock return are taken into consideration, while risk concerns the volatility of the companies’ share prices. The various explanatory variables used include the net cash flow, free cash flow, cash conversion cycle days, cash flow from operating activities, cash flow from investing activities, cash flow from financing activities, inventory days, customer days and supplier days.

Findings

The empirical results provide evidence of a positive relationship between financial performance and net cash flow and free cash flow. In addition, operating cash flow is positively related to financial performance. The opposite is the case for investing and financing cash flow. Finally, some evidence of a negative relationship between financial performance and inventory and customer days is provided too. On the other hand, stock return and risk are not related to the cash flow management variables at all.

Originality/value

To the best of my knowledge, this is one of the few studies to examine the relationship of cash flow management with performance and risk, using data from the Greek stock market. The results can form an effective selection tool for investors seeking Greek companies with the highest financial performance potential, which may reward them with higher dividends.

Details

EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1450-2194

Keywords

Article
Publication date: 6 October 2023

Kalyani Mulchandani, Ketan Mulchandani and Megha Jain

The study examines the influence of a firm's life cycle on the cash flow classification of Indian firms.

Abstract

Purpose

The study examines the influence of a firm's life cycle on the cash flow classification of Indian firms.

Design/methodology/approach

The study employs Dickinson's (2011) cash flow patterns to classify firm years under various life-cycle stages. Cash flow classification is employed to measure a firm's classification shifting (CS) practices. The study includes Indian firms listed on the Bombay Stock Exchange during 2012–2020, an ordinary least squares regression model, a fixed-effect model and a panel corrected with standard error regression method.

Findings

Firms face different opportunities and challenges at different stages of the firm's life cycle and therefore adopt cash flow CS. The results show that firms adopt cash flow CS during introduction, growth and decline stage of life cycle either to boost or to reduce operating cash flows.

Originality/value

This study is one of its kind to study the influence of a firm's life cycle on the cash flow classification of Indian firms.

Details

Asian Review of Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 14 October 2022

Neerav Nagar and Mehul Raithatha

The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing.

Abstract

Purpose

The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing.

Design/methodology/approach

The sample comprises of firms from an emerging market, India with data for years 2004 through 2015. The authors use the methodology given in Roychowdhury (2006).

Findings

The authors find that corporate boards in India play an active role in curbing cash flow manipulation through real activities but fail to control cash flow manipulation through misclassification and timing.

Practical implications

The study suggests that corporate boards should pay more attention to the reported cash flow numbers. Regulators can reduce the opportunities available for cash flow misclassification by fixing relevant accounting and governance norms. Auditors can also help by critically focusing on the cash flow classifications presented by management.

Originality/value

This study, to the authors’ knowledge, is the first study that talks about the role of internal governance in a trade-off between different cash flow manipulation techniques.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 12 July 2023

Imad Jabbouri, Yassine Benrqya, Harit Satt, Maryem Naili and Kenza Omari

This study examines the impact of firm-specific and macroeconomic factors on the working capital behavior of firms listed in the Middle East and North African (MENA) region.

Abstract

Purpose

This study examines the impact of firm-specific and macroeconomic factors on the working capital behavior of firms listed in the Middle East and North African (MENA) region.

Design/methodology/approach

This study is based on a panel data analysis of 687 firms listed on 11 MENA markets, carried out using the Generalized Method of Moments (GMM) approach.

Findings

The results of this study reveal that profitable firms with high levels of operating cash flows adopt a conservative working capital management. Young firms with rapid growth rates, highly leveraged firms and firms with large investments in fixed assets have higher liquidity needs, which explains their tendency to pursue aggressive working capital strategies. Similarly, large firms exercise their bargaining power over their clients and suppliers to implement an aggressive approach of working capital management. Finally, firms do not have the luxury to decide how working capital should be managed when they are subject to outside macroeconomic forces that affect their stakeholders as well.

Practical implications

The findings of this study can help managers adopt efficient practices and identify optimal working capital levels. Firms in the MENA region maintain excess reserves of cash, which causes under-investment and inefficient allocation of resources in the economy. Improving working capital management practices can allow firms to regain operational efficiency, enhance financial performance and support economic growth.

Originality/value

To the best of the authors' knowledge, this study investigates this topic in MENA emerging markets and contributes to enriching the existing corporate finance literature in emerging markets.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 12 April 2023

Heba Abou-El-Sood

This paper is motivated by the ongoing debate on the value relevance of cash flow statement (CFS) between bank regulators, on one hand, and accounting standard setters, on the…

Abstract

Purpose

This paper is motivated by the ongoing debate on the value relevance of cash flow statement (CFS) between bank regulators, on one hand, and accounting standard setters, on the other hand. The importance and usefulness of cash flows during economic turmoil exacerbated by the Covid-19 pandemic has recently gained attention. Hence, this paper investigates the impact of Covid-19 pandemic on the value relevance of cash flows (CF) beyond accounting earnings and book equity.

Design/methodology/approach

A panel of 236 bank-year observations is examined for value relevance in emerging capital markets of Gulf Cooperation Council (GCC) countries. Using value relevance regression, operating and non-operating CF items are tested for value relevance beyond earnings and book value of equity during the periods 2018–2019 (pre-pandemic) and 2020–2021 (pandemic).

Findings

There is limited value relevance of CF beyond accounting earnings and the book value of equity. The distinction between operating and non-operating CF is not informative. However, the value relevance is significant during the pandemic, indicating that investors rely on CF for valuation purposes at times of uncertainty, corroborating further research on CF distress predictive ability.

Originality/value

This paper provides novel evidence on value relevance of CF and its superiority to accounting earnings and equity values during times of uncertainty. It extends a small body of research in the banking sector in emerging markets. Hence, it complements prior literature and has practical implications to accounting standard setters and bank regulators in emerging markets.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 13 February 2024

Ajid ur Rehman, Asad Yaqub, Tanveer Ahsan and Zia-ur-Rehman Rao

This study aims to investigate earnings management practice of classification shifting of revenues in Chinese-listed firms.

Abstract

Purpose

This study aims to investigate earnings management practice of classification shifting of revenues in Chinese-listed firms.

Design/methodology/approach

The study employs a dataset of 2,920 A-listed firms from Chinese stock exchanges of Shanghai and Shenzhen for the period of 2003–2019. We apply both univariate and panel regression analysis by using fixed effect estimation with robust standard errors.

Findings

Our findings reveal that firms misclassify revenues by taking advantage of the flexibility provided by applicable financial reporting standards. The empirical evidence obtained through regression analysis suggest that managers reclassify non-operating revenues as operating revenue to alter the economic reality while seeking the advantage of financial reports users’ vulnerability for valuing the upper half of income statement items more as compared to lower part. The results further indicate that international financial reporting standards adoption inhibits the earnings management practices using classification shifting of revenues. It is also concluded that firms, which are suffering losses or having low growth, are more persistently involved in misclassification of revenues.

Originality/value

The study is unique from the point of view that it investigates earnings management from the prospective of revenue’s classification in an emerging market characterized by various market imperfections such as lower investor protection and higher information asymmetry.

Details

Journal of Accounting in Emerging Economies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 6 March 2023

Gökberk Can, Rezart Demiraj and Hounaida Mersni

The purpose of the article is to examine the effect of life cycle stages on capital expenditures, using Borsa Istanbul-listed companies.

Abstract

Purpose

The purpose of the article is to examine the effect of life cycle stages on capital expenditures, using Borsa Istanbul-listed companies.

Design/methodology/approach

The panel data estimation procedure was used as the primary method to test the hypothesis. The authors used four additional analyses to check the robustness of the results. The model was tested for endogeneity using the generalized method of moments (GMM) estimation. Quantile regression was utilized for the non-parametric test of the model. In the third robustness test, the sample was divided into two using financial constraints with the Size-Age (SA) Index proposed by Hadlock and Pierce (2010). The last analysis removed the global financial crisis (GFC) years from the sample.

Findings

Borsa Istanbul-listed companies tend to invest less as they move forward in their life cycle stages. The results show that market capitalization, operating cash flow levels and leverage positively affect capital expenditure investments. The empirical evidence also revealed that cash holding levels have a negative effect on capital expenditure decisions. Robustness tests support the results.

Practical implications

The findings are potentially useful for investors and managers. Having the information that decreasing capital expenditures signals that the company is in the last stages of its life would be a sign for managers to improve their investment strategies to avoid getting out of business and survive. They need to find options and solutions to propel their companies back on a path of growth. Additionally, the same information could be vital for investors' investment decisions.

Originality/value

This paper contributes to the literature by providing evidence about the effect of life cycle stages on capital expenditures from an emerging market. To the best of the authors’ knowledge, it is the first paper to investigate empirically how moving forward in the life cycle stages affects capital expenditures in an emerging market.

Details

EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1450-2194

Keywords

Article
Publication date: 8 April 2022

Fitim Deari, Agim Kukeli, Nicoleta Barbuta-Misu and Florina Oana Virlanuta

The paper aims to investigate the dynamic relationship between working capital management and firm profitability for a sample of firms from eight European Union (EU) countries for…

Abstract

Purpose

The paper aims to investigate the dynamic relationship between working capital management and firm profitability for a sample of firms from eight European Union (EU) countries for the period 2006–2015.

Design/methodology/approach

The panel regression model is used in the study. Firm profitability is measured using the return on assets (ROA) ratio, whilst cash conversation cycle, financial leverage, size, tangibility and cash flow ratio are used as independent variables. The novelty of this study is the use of cash flow ratio to develop the analysis firms by dividing them as healthy and nonhealthy.

Findings

The paper reveals that working capital management affects firm profitability, and a positive relationship exists between them. The paper shows differences of working capital management and firm profitability across countries. The striking result of this study is that an inverted U-shape relationship exists between working capital management and firm profitability. Whereas the findings suggest that firms should be as close as possible to the optimal length of cash cycle to increase profitability, and managers should give a priority to working capital optimization.

Originality/value

The authors consider results of this study relevant to both researchers and business policymakers in the field of working capital management policies.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 20 December 2023

Stephen Gray and Arjan Premti

The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management.

Abstract

Purpose

The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management.

Design/methodology/approach

This study uses the incremental R-square approach as in Kim and Kross (2005) to examine how much lenders rely on income statement and balance sheet ratios as the degree of real earnings management increases.

Findings

As real earnings management affects mostly the income statement, the authors find that lenders rely less on income statement ratios in making credit decisions in the presence of real earnings management. The authors also find that lenders do not alter their reliance on balance sheet ratios when faced with real earnings management.

Originality/value

This paper is the first to study how lenders alter their reliance on financial statements in making credit decisions in the presence of real earnings management. The findings of this paper could help the regulators set standards to improve the usefulness of financial statements. The findings of this paper could also help practitioners (borrowers and lenders) understand how real earnings management affects credit decisions.

Details

Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0307-4358

Keywords

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