Forecasting the liquidity of very small private companies

Short-term liquidity of very small private companies (VSPCs) is important to creditors as any cash shortages result in opportunity costs due to delayed payments. We use a publicly available liquidity indicator for 19,627 Slovenian VSPCs as a special, but generalizable case of “credit record” data and financial ratios to predict possible cash shortages. Indicator is predicted and used in lagged form(s) as a predictive variable with/without financial ratios, allowing comparisons. Models, including financial ratios, are less efficient than models based on lagged liquidity indicator alone. Surprisingly, combined models perform only marginally better. Despite high overall accuracy, misclassification of companies experiencing cash shortages is high.     

Valuation and Forecasting Roles of Dividends of Indonesian Listed Firms

We study the role of dividends in valuation and in forecasting future earnings in a low‐protection environment with highly concentrated ownership that is expected to yield low earnings quality. Using a sample of 372 distinct Indonesian firms listed on the IDX during the period 1995 to 2012 we show that dividends are reliably positively priced by the capital market, violating thus the dividend displacement theorem. This result persists even after controlling for some typical factors that affect firm value (capital structure, risk) and the effect of factors not separately identified, but priced by the Indonesian capital market (other information). Dividends replace accounting earnings entirely in valuation. Dividends are positively correlated to future earnings over and above current accounting earnings and other accounting and market variables. Both findings show that dividends play a central role on the Indonesian capital market. Finally, we show evidence consistent with the view that earnings management of Indonesian firms after 2002 is contractually efficient rather than opportunistic.     

Asset Write‐offs in Private Firms – The Case of German SMEs

This paper finds that private firms make the decision to write off, and write off more in terms of total amount, if they are: (i) more profitable, (ii) have more financial debt, and (iii) pay dividends. Our findings are contrary to expectations based on accounting standards and the existing revaluation literature. They are, however, consistent with the codified, high book‐tax alignment economic setting in which sample private firms operate. This includes agency problems faced by private firms’ stakeholders. We use a comprehensive sample of German SMEs reporting in local GAAP, based on the German commercial code (Handelsgesetzbuch) in 2003–2006. We view write‐offs as corrections of departures of book values from their underlying economic values, in contrast to upward asset revaluations. This governs our choice of estimation – the tobit regression.     

The Term Structure of Implicit Discount Rates in Security Valuation

Abstract:   A reformulation of the residual income model is used to generate estimates of discount rates implicit in UK security prices. The terminal value of the infinite valuation model is incorporated into the coefficient on current earnings. By varying the length of the forecast horizon, different combinations of implicit discount rates are revealed that allow the estimation of time‐variant costs of equity. Results indicate no specific pattern of discount rates, thus revealing neither myopia on short‐term earnings nor excessive optimism on long(er)‐term earnings. Surprisingly, there is weak evidence that if any myopia exists, it is concentrated in larger and lower price‐earnings firms.     

Earnings Quality and Market Values of Indonesian Listed Firms

We find that earnings quality (EQ) is reliably negatively correlated with the market values of equity of firms listed on the Jakarta Stock Exchange (IDX). The financial reporting process produces earnings viewed as increasingly ‘incomplete’ for valuation purposes by the capital market despite moves towards high‐quality financial reporting standards (IFRS) during the sample period 1995–2015. Time‐series analyses reveal that EQ decreases rather than increases through time. The role of earnings in valuation is replaced by other attributes, most notably net dividends. Firms that pay out dividends are valued significantly higher, and firms that issue equity are valued lower. These results are robust regardless of other accounting, market and governance controls. Large and closely held firms are valued higher than smaller firms, consistent with some aspects of the political cost hypothesis. Shares with higher idiosyncratic risk are valued higher, consistent with option value, as are shares where the volume of shares traded is more volatile. Collectively, the results indicate that the mere adoption of high‐quality accounting standards (IFRS) and other nominal changes in capital market regulations do not automatically increase the quality of the financial reporting process.     

Dividend Irrelevance and Accounting Models of Value

In accounting models of value, dividends typically appear to have a strong positive relationship with value despite theoretical reasons to expect dividend displacement. We show that this result is driven by the relationship between dividends and both core earnings and other information derived from the valuation error in the prior year. Where core earnings can be effectively modelled in a specification including other information, dividend displacement is no longer rejected. Under these circumstances dividends exhibit weak incremental predictive power for earnings and earnings expectations and hence have little impact on value. We show that valuation models are sensitive to model specification and should be used with caution when testing the value impact of firm characteristics or accounting numbers.     

Accounting Quality in Private Firms During the Transition Towards International Standards

We study the historical development of Slovenian Accounting Standards (SAS) and their association with accounting quality (AQ). We focus on private firms where the financial reporting process is characterised by low demand for high-quality reporting. We investigate three distinct editions of SAS since 1994 and test how their development towards international standards is related to AQ. Aggregate earnings management measures indicate that the use of accounting discretion decreases with less earnings smoothing over time. The main features of AQ have been consistent throughout historical development. Asymmetric timeliness of earnings, the ability of earnings to predict future cash flows, and the ability of accruals to mitigate mismatching are all present throughout. We also document typical departures from properties of high AQ. For example, accruals do not (always) facilitate timely recognition of losses. However, these can be attributed to the overwhelming influence of reporting incentives (e.g. taxation, debt, size) rather than to the (lower) quality of accounting standards.