The decision usefulness of the direct versus indirect presentation method of a cash flow statement has been a long-standing issue in both practice and accounting research. By capitalizing on ...comparative advantages of experimental methods, we provide insights into how investors process the information contained in different presentation methods to make cash flow forecasts, especially in the context of various types of nonrecurring items. We predict and find that, when nonrecurring accrued expenses are present, the indirect method leads to lower forecast errors by activating investors’ underlying knowledge structures of operating cash flows in terms of an accrual (versus cash) basis. We also find that, in the presence of nonrecurring cash or nonrecurring accrued revenues, there is no difference in forecast errors between the indirect and direct methods. Moreover, we find that the combination of the direct and indirect methods (the direct-plus-indirect method) leads to lower forecast errors than the direct method, but it does not provide an incremental benefit for forecast accuracy beyond the indirect method.
This paper was accepted by Brian Bushee, accounting.
Funding:
The authors acknowledge financial support from Chulalongkorn Business School, Korea University Business School, and the United Overseas Bank Endowment Fund.
Supplemental Material:
The e-companion and data are available at
https://doi.org/10.1287/mnsc.2022.4406
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PurposeThe study examines the influence of a firm's life cycle on the cash flow classification of Indian firms.Design/methodology/approachThe 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.FindingsFirms 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/valueThis study is one of its kind to study the influence of a firm's life cycle on the cash flow classification of Indian firms.
Analyzing cash flows and undertaking project financing are important for contractors in managing construction projects. Traditional methods for cash flow analysis are based on the manual integration ...of time and cost information. However, the manual integration process can be automated by using five-dimensional building information modeling (5D BIM). Previous studies on 5D BIM have focused on estimating cash outflow rather than cash inflow analysis and project financing. This paper proposes a BIM-based methodology framework for cash flow analysis and project financing. The framework considers contract types and retainage to estimate cash inflow, and cash outflow patterns for equipment, manpower, and materials in order to more accurately measure cash outflow. Project financing scenarios can also be evaluated using the framework. Illustrative examples are demonstrated to validate the proposed framework by considering two what-if scenarios. Results show that the framework can help contractors analyze the cash flow and make appropriate decisions for different design and payment scheme alternatives in construction projects.
•A 5D BIM-based framework is proposed for cash flow analysis and project financing.•Both cash outflow and inflow are considered to analyze cash flow accurately.•Cash inflow is estimated by considering contract types and retainage.•Actual equipment, manpower, and material payment patterns are considered.•Project financing scenarios with different options are analyzed and compared.
The research aims at analyzing the aggregate effect of possible errors related to the "textbook" method of present value calculation. Two main errors could stem from end-of-period convention and ...calculation according to expected lifespan. The magnitude of such errors depends on the cash flow pattern and the probability distribution of asset life, therefore the combination that may be regarded as the most typical in practice has been chosen as the subject of the examination, i.e., the continuous exponential cash flow pattern with exponentially distributed life. Based on the result of previous studies examining the errors separately, it seems possible that the two errors lead to a more accurate approximation – considering the absolute value of the relative error – compared to making only one of the errors. After the examination, I conclude that in the most typical cases of practice, it is not worth to take either the correct cash flow pattern or the life uncertainty into account beyond the "textbook" method.
Samenvatting Als bedrijven meer zaken doen, hebben ze ook relatief meer liquiditeiten ("kasgeld") nodig. Maar ook als ze meer risico hebben kan dat het geval zijn, vooral na de wereldwijde financiële ...crisis van 2008/09. De Nederlandse kasratio (kasgeld/activa) blijkt weliswaar in belangrijke mate stabiel te zijn, maar past zich vertraagd bij omstandigheden aan. Sommige bedrijfsspecifieke factoren doen er daarbij toe: de bedrijfsomvang, het niveau van het werkkapitaal en de marktwaarde versus boekwaarde ratio. De genoemde effecten worden aangetoond in een steekproef van beursgenoteerde bedrijven met hoofdkantoren in Nederland, waarbij er onderscheid wordt gemaakt tussen de jaren 2002-2009 en 2010-2018. Het idee dat het liquiditeitsbeheer steeds meer een onderdeel is geworden van het financieel risicobeheer in plaats van andersom is gewettigd vanwege de onverwachte positieve invloed van werkkapitaal en de invloed van volatiliteit van kasstromen op de kasratio na de financiële crisis. Keywords: Kasgeld, Nederland, financiële crisis, (sectorale) cashflow volatiliteit, (complementair) werkkapitaal
The FASB, PCAOB, SEC, and AICPA have all acknowledged that the accounting field needs to revisit the statement of cash flows (SCF). While the overall number of restatements has held steady over the ...past five years, the percentage of cash flow restatements (CFRs) has risen from 8.7% of all restatements in 2009 to 20.2% of all restatements in 2014. We examine the determinants of CFRs, investors’ differential beliefs about CFRs, and the information content of CFRs by focusing on abnormal trading volume and price reactions to CFRs. We then examine whether the guidance the SEC/AICPA published in early 2006 changed the information content of CFRs. Finally, since the proper classification within the SCF is a current regulatory issue, we examine whether classification shifting within the SCFs impacts the market. The market finds CFRs to be informative with some investor disagreement as shown by higher abnormal trading volume. We also find an incremental volume reaction to changes in operating cash flows after the SEC allowance period. While the market responds negatively to CFRs, we find that the market does not differentiate between whether classification shifting occurs or does not occur with the CFR. This study has implications for policymakers, auditors, and investors since it is one of the first to examine the capital market consequences of CFRs.
Marketing affects customer behavior, and customer behavior in turn drives a firm's cash flows and, ultimately, valuation. In this sequence of relationships, a commonly overlooked factor by marketers ...is the volatility of customers' cash flows. This study links different recurring customer behaviors to the future level and volatility of a customer's cash flows. Empirical analyses of the large customer database of a Fortune 500 retailer reveal that a 1% desired change in the different types of recurring customer behaviors corresponds to a future quarterly 4.61% decrease in the cash flow volatility and $39.42 million increase in the future cash flow level of the firm. Furthermore, firm-initiated marketing is 1.9–3.2 times more effective at managing the future cash flow level and volatility when it is selectively targeted to customers with certain characteristics. Overall, the study enables marketers to manage different customer behaviors that influence customers' future cash flow level and volatility and ultimately quantify the impact of these behaviors on the shareholder value of the firm.
Short interest and aggregate stock returns Rapach, David E.; Ringgenberg, Matthew C.; Zhou, Guofu
Journal of financial economics,
07/2016, Letnik:
121, Številka:
1
Journal Article
Recenzirano
We show that short interest is arguably the strongest known predictor of aggregate stock returns. It outperforms a host of popular return predictors both in and out of sample, with annual R2 ...statistics of 12.89% and 13.24%, respectively. In addition, short interest can generate utility gains of over 300 basis points per annum for a mean-variance investor. A vector autoregression decomposition shows that the economic source of short interest’s predictive power stems predominantly from a cash flow channel. Overall, our evidence indicates that short sellers are informed traders who are able to anticipate future aggregate cash flows and associated market returns.
Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast ...future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these estimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance. After conducting several tests for self-selection concerns, we conclude that the direct method is valuable to investors when forecasting future cash flows and earnings.
We propose a new investor sentiment index that is aligned with the purpose of predicting the aggregate stock market. By eliminating a common noise component in sentiment proxies, the new index has ...much greater predictive power than existing sentiment indices have both in and out of sample, and the predictability becomes both statistically and economically significant. In addition, it outperforms well-recognized macroeconomic variables and can also predict cross-sectional stock returns sorted by industry, size, value, and momentum. The driving force of the predictive power appears to stem from investors' biased beliefs about future cash flows.
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