We study the liquidity properties of private equity cash flows using data from 837 buyout and venture capital funds from 1984 to 2010. Most cash flow variation at a point in time is diversifiable — ...either idiosyncratic to a given fund or explained by the fund’s age. Both capital calls and distributions also have a procyclical systematic component. Distributions are more sensitive than calls, implying procyclical aggregate net cash flows. A consequence is that the well-known finding that funds raised in hot markets underperform in absolute terms is sharply attenuated when comparing to public equities. Consistent with a liquidity premium for calling capital in bad times, we find that funds with a relatively high propensity to do so perform better in both absolute and relative terms. Venture capital cash flows and performance are considerably more cyclical than buyout, and the links between cyclical cash flows and performance are likewise stronger.
Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior ...research uncovers two anomalies: expected returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability subsumes accruals in predicting the cross section of average returns. An investor can increase a strategy’s Sharpe ratio more by adding just a cash-based operating profitability factor to the investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.
This paper argues that the Statement of Cash Flows should be re‐oriented around the concept of Cash Flows to Equity Holders. This re‐orientation seems attractive for conceptual and internal ...consistency reasons. The Income Statement and the Balance Sheet are already oriented around reporting the residual claim of equity holders. Thus, re‐orienting the Statement of Cash Flows around Cash Flows to Equity Holders naturally aligns it with the other two principal financial statements. The change also has considerable practical appeal for major users of financial reporting, especially investors who are interested in equity cash flows for forecasting and valuation. Finally, the proposed change is unusually easy to implement, essentially limited to different presentation of already existing information.
International Financial Reporting Standards (IFRS) allow managers flexibility in classifying interest paid, interest received, and dividends received within operating, investing, or financing ...activities within the statement of cash flows. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 76, 60, and 57% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, higher leverage, and accessing equity markets more frequently. In analyzing the consequences of reporting flexibility, we find some evidence that the market’s assessment of the persistence of operating cash flows and accruals varies with the firm’s classification choices and the results of certain OCF prediction models are sensitive to classification choices.
The Changing Landscape of Accrual Accounting BUSHMAN, ROBERT M.; LERMAN, ALINA; ZHANG, X. FRANK
Journal of accounting research,
March 2016, Letnik:
54, Številka:
1
Journal Article
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A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show ...that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R² from regressing (changes in) accruals on (changes in) cash flows drops from about 70% (90%) in the 1960s to near zero (under 20%) in more recent years. In exploring potential reasons for the observed attenuation, we find that increases in non-timing-related accrual recognition, as proxied by one-time and nonoperating items and the frequency of loss firm-years, explain the majority of the overall decline. On the other hand, temporal changes in the matching between revenues and expenses, and the growth of intangible-intensive industries play only a limited role in explaining the observed attenuation. Finally, the relative decline of the timing role of accruals does not appear to be associated with an increase in the asymmetrically timely loss recognition role.
The International Integrated Reporting Council's Framework identifies two goals for integrated reporting: improved information for outside providers of financial capital and better internal decision ...making. We extend prior research that finds a positive association between integrated report quality (IRQ) and firm value by examining two channels through which this association may arise—a capital market channel and a real effects channel. To conduct these tests, we disaggregate firm value into three components: liquidity, cost of capital, and expected future cash flows. Using data from South Africa where integrated reporting is mandatory and an IRQ measure based on proprietary EY data, we find a positive association between IRQ and liquidity, which supports the capital market channel. We find no evidence of a relation between IRQ and cost of capital. We also find a positive association between IRQ and expected future cash flows. Because this association could reflect better investor cash flow forecasts—a capital market effect, better internal decisions—a real effect, or both, we attempt to distinguish these explanations. We find higher IRQ is (not) associated with higher realized future operating cash flows (greater analyst target price forecast accuracy), and find higher IRQ is associated with higher investment efficiency. These findings support the real effects channel. Together, our findings are consistent with integrated reporting achieving its dual objective of improved external information and better internal decisions.
This paper examines whether the firm-level accrual and cash flow effects extend to the aggregate stock market. In sharp contrast to previous firm-level findings, aggregate accruals is a strong ...positive time series predictor of aggregate stock returns, and cash flows is a negative predictor. In addition, innovations in accruals are negatively contemporaneously correlated with aggregate returns, and innovations in cash flows are positively correlated with returns. These findings suggest that innovations in accruals and cash flows contain information about changes in discount rates, or that firms manage earnings in response to marketwide undervaluation.
Calls for eliminating differences between accounting earnings and taxable income in the US have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will ...increase and earnings quality will improve. Opponents argue that earnings quality will decline. We examine whether the level of required book-tax conformity affects earnings persistence and the association between earnings and future cash flows. We develop a comprehensive book-tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher. Our evidence suggests that increased book-tax conformity may reduce earnings quality.
•This study examines firms' political connections in an emerging economy like India.•This article investigates the investment behavior of firms and how political connections influence investment cash ...flow sensitivities.•We examine how political connections impact financially constrained firms and their investment-cash flow sensitivities.•The political connections are explored via two channels –a) donations channel and b) the promoter of firm owner channel and its effectivity on firms' investment behavior and cash flows.
The study examines the associations between political connections, cash flows, and firm investments of Indian firms. Using a sample of 1,953 listed firms on the National Stock Exchange from 2009 to 2021, we investigate how political connections benefit financially constrained firms. We use both donation and promoter channels of political connections as a proxy for political connection. Our analysis shows that politically connected firms' investment cash flow sensitivities are lower than that of politically non-connected firms. Subsequently, we observe that politically connected, financially constrained firms do not rely heavily on internal cash for investments.
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