Degree of free cash flow leverage

2019 ◽  
Vol 18 (3) ◽  
pp. 346-365 ◽  
Author(s):  
David Yecham Aharon ◽  
Yoram Kroll ◽  
Sivan Riff
Keyword(s):  
Cash Flow ◽  
Capital Expenditure ◽  
Risk Measure ◽  
Efficient Frontier ◽  
Optimal Level ◽  
Free Cash Flow ◽  
Content Type ◽  
Optimal Output ◽  
The Cost ◽  
The Impact

Purpose This paper aims to forgo the conventional (degree of operating leverage) risk measure by replacing elasticity of operating profits with respect to output with elasticity of free cash flow (FCF) with respect to optimal output and by considering exogenous random demand shocks for the firm’s products as a source of risk. Design/methodology/approach The elasticity risk measure accounts for corporate taxes and the cost of bankruptcy. The methodology is selecting optimal level of production investment and capital structure to generate efficient frontier of expected FCF and its risk in terms of its elasticity with respect to output. Findings The risk measure leads to efficient frontier between expected FCF and its idiosyncratic managerial risk. The model also resolves the empirical debate on the tradeoff between operating and financial leverages. Originality/value It is the first elasticity risk measure that embodied the impact of future level of capital expenditure, total level of assets and their sensitivity to random shocks in the product market.

Corporate cash flow and dividends smoothing: a panel data analysis at Bursa Malaysia

2015 ◽  
Vol 13 (1) ◽  
pp. 2-19 ◽  
Author(s):  
Apedzan Emmanuel Kighir ◽  
Normah Haji Omar ◽  
Norhayati Mohamed
Keyword(s):  
Panel Data ◽  
Cash Flow ◽  
Panel Data Analysis ◽  
Generalized Method Of Moments ◽  
Cash Flows ◽  
Payout Policy ◽  
Free Cash Flow ◽  
Content Type ◽  
Financial Firms ◽  
The Impact

Purpose – The purpose of this paper is to contribute to the debate and find out the impact of cash flow on changes in dividend payout decisions among non-financial firms quoted at Bursa Malaysia as compared to earnings. There has been renewed debate in recent finance and accounting literature concerning the key determinants of changes in dividends payout policy decisions in some jurisdictions. The conclusion in some is that firms base their dividend decisions on cash flows rather than published earnings. Design/methodology/approach – The research made use of panel data from 1999 to 2012 at Bursa Malaysia, using generalized method of moments as the main method of analysis. Findings – The research finds that Malaysia non-financial firms consider current earnings more important than current cash flow while making dividends payout decisions, and prior year cash flows are considered more important in dividends decisions than prior year earnings. We also found support for Jensen (1986) in Malaysia on agency theory, that managers of firms pay dividends from free cash flow to reduce agency conflicts. Practical implications – The research concludes that Malaysian non-financial firms use current earnings and less of current cash flow in making changes in dividends policy. The policy implication is that current earnings are dividends smoothing agents, and the more they are considered in dividends payout decisions, the less of dividends smoothing. Social implications – If dividends smoothing is encouraged, it could lead to dividends-based earnings management. Originality/value – The research is our novel contribution of assisting investors and government in making informed decisions regarding dividends policy in Malaysia.

Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital

2010 ◽  
Vol 46 (1) ◽  
pp. 171-207 ◽  
Author(s):  
Kevin C. W. Chen ◽  
Zhihong Chen ◽  
K. C. John Wei
Keyword(s):  
Cash Flow ◽  
Agency Problems ◽  
Equity Capital ◽  
Free Cash Flow ◽  
Shareholder Rights ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
The Cost ◽  
The Impact ◽  
Implied Cost Of Equity

AbstractIn this paper, we examine the effect of shareholder rights on reducing the cost of equity and the impact of agency problems from free cash flow (FCF) on this effect. We find that firms with strong shareholder rights have a significantly lower implied cost of equity after controlling for risk factors, price momentum, analysts’ forecast biases, and industry and year effects than do firms with weak shareholder rights. Further analysis shows that the effect of shareholder rights on reducing the cost of equity is significantly stronger for firms with more severe agency problems from FCFs.

scholarly journals ASSET INSTRUMEN KEUANGAN DAN FREE CASH FLOW TERHADAP NILAI PERUSAHAAN: DIVIDEND PAYOUT RATIO SEBAGAI PEMODERASI

2019 ◽  
Vol 21 (1) ◽  
pp. 27-38
Author(s):  
SUWALDIMAN SUWALDIMAN ◽  
JAMHARI RAMADHAN
Keyword(s):  
Cash Flow ◽  
Firm Value ◽  
Capital Expenditure ◽  
Market Price ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Manufacturing Companies ◽  
Financial Instrument ◽  
Dividend Payout ◽  
The Impact

This research examines the impact of financial instrument assets and free cash flow on the firm value. This research also tests the dividend payout ratio as the moderating variables. Data sample were taken out of the manufacturing companies listed in BEI for period of 2014 – 2016. Firm value is defined and measured as the share market price five days as the audit report released. Financial instrument assets is defined and measured by the ratio of the total financial assets to the total assets. Meanwhile free cash flow is measured by comparing the operating cash flows less by capital expenditure to the operating cash flow. Finally, dividend payout is measured by the ratio of dividend per share to the earnings per share. Regression analysis is employed to test relationship among those variables. This research reveals that the financial instrument assets have a positive and significant impact on the firm value. However, this research does not prove that the free cash flow has a positive and significant impact on the firm value. Moreover, the dividend payout ratio strengthens the impact of financial instrument assets on the firm value, but not the free cash flow. It can be concluded that market will respond positively to the information of increasing in the financial instrument assets. And the increasing in the dividend payout ratio will strengthen to the relationship. In contrast, free cash flow is not significantly responded by the market and either the dividend payout ratio.

Sticky cost behavior and its implication on accounting conservatism: a cross-country study

2020 ◽  
Vol 18 (1) ◽  
pp. 169-197
Author(s):  
Yosra Makni Fourati ◽  
Rania Chakroun Ghorbel ◽  
Anis Jarboui
Keyword(s):  
Cash Flow ◽  
Fixed Effects ◽  
Free Cash Flow ◽  
Accounting Conservatism ◽  
International Context ◽  
Content Type ◽  
Conditional Conservatism ◽  
Cost Behavior ◽  
The Impact ◽  
Cost Stickiness

Purpose This paper aims to investigate the impact of cost stickiness on conditional conservatism. Design/methodology/approach The research sample consists of listed companies from 18 countries, using stock market indices of the BRICS, MIST, North Africa, USA and EU over the period ranging from 1997 to 2015. The authors use the firm-fixed effects method in the estimation of the models. Findings The results provide evidence of the existence of cost stickiness and conditional conservatism in the international context, using the Banker et al. (2016) model. They also argue that the conditional conservatism model (Basu, 1997) is overstated because it does not control for cost stickiness. In additional analyses, the authors conclude that the association between cost stickiness and accounting conservatism changes across country groups and across industries. The authors also document that the employee intensity and free cash-flow, as cost stickiness determinants, remain significant in the model including accounting conservatism. Moreover, the findings show that sticky cost behavior distorts inferences about standard demand drivers of conservatism such as leverage and size. Originality/value The findings are interesting and provide a better understanding of cost stickiness and conditional conservatism, and the interaction between these two phenomena in the international context, across country groups and across industries. To the best of the author’s knowledge, the study is the first one including free cash flow as a proxy for agency problem in the full model combining conservatism and cost stickiness models (Banker et al., 2016).

An investigation into the effect of surplus free cash flow, corporate governance and firm size on earnings predictability

2014 ◽  
Vol 22 (2) ◽  
pp. 118-133 ◽  
Author(s):  
Redhwan Ahmed AL-Dhamari ◽  
Ku Nor Izah Ku Ismail
Keyword(s):  
Corporate Governance ◽  
Cash Flow ◽  
Firm Size ◽  
Negative Impact ◽  
Governance Structure ◽  
Free Cash Flow ◽  
Least Square ◽  
Content Type ◽  
Earnings Predictability ◽  
The Impact

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.

Unexpected investment, tunnelling and financial constraints

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Le Hong Ngoc Ha ◽  
An Thai
Keyword(s):  
Cash Flow ◽  
Financial Constraints ◽  
Agency Problems ◽  
Free Cash Flow ◽  
Content Type ◽  
Corporate Managers ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Stock Market Investors ◽  
The Impact

PurposeBased on a sample of 1,435 Vietnamese listed firms over the period from 2005 to 2017, this study examines the sensitivity of unexpected investment to free cash flow and its mechanism.Design/methodology/approachWe tested three hypotheses using two-step system-GMM to investigate investment–cash flow sensitivity for various firm scenarios while accounting for confounding variables.FindingsFirms with negative free cash flow are more likely to engage in underinvestment; conversely, overinvestment is found primarily in firms with positive free cash flow. In terms of the mechanism, while underinvesting decisions are caused mainly by financial constraints, overinvesting behaviour primarily resulted from agency problems, typically in the form of principal-principal conflicts. Interestingly, under the impact of negative cash flow observations, financial constraints tend to decrease investment–cash flow sensitivity. Conversely, the agency costs hypothesis reveals that agency problems are more likely to increase investment–cash flow sensitivity.Originality/valueThese findings not only contribute to the current corporate literature but also provide some important practical implications for stock market investors, corporate managers, and policy-setting bodies, specifically in the Vietnamese market.

Information content of dividends: a case of an emerging financial market

2014 ◽  
Vol 31 (3) ◽  
pp. 272-290 ◽  
Author(s):  
Reza H. Chowdhury ◽  
Min Maung ◽  
Jenny Zhang
Keyword(s):  
Cash Flow ◽  
Financial Market ◽  
Good Governance ◽  
Free Cash Flow ◽  
Cash Dividend ◽  
Chinese Firms ◽  
Content Type ◽  
Dividend Payments ◽  
Dividend Increases ◽  
The Impact

Purpose – The purpose of this paper is to examine the signaling and free cash flow hypotheses of dividends in the context of an emerging financial market. Design/methodology/approach – The authors use fundamental financial information of Chinese companies listed in the Shenzhen and Shanghai stock exchanges. They examine the impact of cash dividend payments on future profitability of individual firms with and without controlling for non-linearity in their earnings to test the signaling hypothesis. They also determine the characteristics of dividend paying firms to examine the free cash flow hypothesis. Findings – It was found that while dividend increases by publicly listed Chinese firms are followed by increases in earnings in two subsequent years, such relationship does not exist in the case of dividend decreases. However, under the assumption of non-linearity of earnings, it was found that neither dividend increases nor dividend decreases convey any valuable information about future changes in earnings of Chinese firms. Further, it was found that firms with high cash holdings, large profitability and high managerial efficiency are likely to pay dividends. The authors therefore conclude that announcements of cash dividend payments do not signal future performance but indicate good governance practices of publicly traded firms in China. Originality/value – This evidence is critical for potential foreign investors in their portfolio investment decisions and for regulators in determining an efficient measure of corporate disclosure in China.

The impact of labor freedom on geographic cost of living differentials

2017 ◽  
Vol 6 (3) ◽  
pp. 385-395
Author(s):  
Richard Cebula ◽  
James E. Payne ◽  
Donnie Horner ◽  
Robert Boylan
Keyword(s):  
Labor Market ◽  
State Level ◽  
The State ◽  
Annual Data ◽  
Significant Finding ◽  
Cost Of Living ◽  
Content Type ◽  
The Usa ◽  
The Cost ◽  
The Impact

Purpose The purpose of this paper is to examine the impact of labor market freedom on state-level cost of living differentials in the USA using cross-sectional data for 2016 after allowing for the impacts of economic and quality of life factors. Design/methodology/approach The study uses two-stage least squares estimation controlling for factors contributing to cost of living differences across states. Findings The results reveal that an increase in labor market freedom reduces the overall cost of living. Research limitations/implications The study can be extended using panel data and alternative measures of labor market freedom. Practical implications In general, the finding that less intrusive government and greater labor freedom are associated with a reduced cost of living should not be surprising. This is because less government intrusion and greater labor freedom both inherently allow markets to be more efficient in the rationalization of and interplay with forces of supply and demand. Social implications The findings of this and future related studies could prove very useful to policy makers and entrepreneurs, as well as small business owners and public corporations of all sizes – particularly those considering either location in, relocation to, or expansion into other markets within the USA. Furthermore, the potential benefits of the National Right-to-Work Law currently under consideration in Congress could add cost of living reductions to the debate. Originality/value The authors extend the literature on cost of living differentials by investigating whether higher amounts of state-level labor market freedom act to reduce the states’ cost of living using the most recent annual data available (2016). That labor freedom has a systemic efficiency impact on the state-level cost of living is a significant finding. In our opinion, it is likely that labor market freedom is increasing the efficiency of labor market transactions in the production and distribution of goods and services, and acts to reduce the cost of living in states. In addition, unlike previous related studies, the authors investigate the impact of not only overall labor market freedom on the state-level cost of living, but also how the three sub-indices of labor market freedom, as identified and measured by Stansel et al. (2014, 2015), impact the cost of living state by state.

Dead Hand Proxy Puts and Hedge Fund Activism

2018 ◽  
Vol 54 (4) ◽  
pp. 1615-1642
Author(s):  
Sean J. Griffith ◽  
Natalia Reisel
Keyword(s):  
Cash Flow ◽  
Hedge Fund ◽  
Cost Benefit ◽  
Free Cash Flow ◽  
Cross Sectional ◽  
Flow Problems ◽  
Banking Relationships ◽  
Hedge Fund Activism ◽  
The Cost ◽  
Sectional Analysis

We investigate the Dead Hand Proxy Put, a contractual innovation in corporate debt agreements that may impact hedge fund activism. We find the provision principally in loans, not bonds, and provide evidence linking the adoption of the provision to hedge fund activism. Furthermore, controlling for endogeneity, we find that the provision significantly reduces the cost of loans. Bondholder wealth also increases. Moreover, cross-sectional analysis of share returns reveals that the provision is positively associated with repeat banking relationships and negatively associated with free cash flow problems, suggesting a cost-benefit tradeoff.

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