Do cash stockpiles fuel cash acquisitions?

U.S. firms currently hold a $2 trillion cash stockpile. We examine if cash stockpiles fuel cash acquisitions by studying the method of payment decision for cash-rich firms. Surprisingly, cash-rich firms are 23% less likely to make cash bids than stock bids, relative to firms that are not cash rich. We examine several potential explanations related to omitted variable bias and endogeneity and the result remains. More specifically, the results are robust to explanations related to agency, financial constraints, tax-related explanations, equity overvaluation, and capital structure. Our evidence implies that the link between cash stockpiles and cash acquisitions is not obvious.     

Does cash flow predict returns?

In this paper, we propose the hypothesis that cash flow and cash flow volatility predict returns. We categorize firms listed on the New York Stock Exchange into sectors, and apply tests for both in-sample and out-of-sample predictability. While we find strong evidence that cash flow volatility predicts returns for all sectors, the evidence obtained when using cash flow as a predictor is relatively weak. Estimated profits and utility gains also suggest that it is cash flow volatility that is more relevant as a source of information than cash flow.     

Are analysts' cash flow forecasts useful?

This study provides evidence that the cost of equity capital decreases with the number of analysts who issue both cash flow and earnings forecasts (cash analysts). The evidence also shows that cash analysts reduce information asymmetry and predict long‐term earnings more accurately than analysts who issue only earnings forecasts. Taken together, these findings suggest that cash analysts provide market participants with high‐quality information and, as a result, firms benefit from cash analyst coverage in the form of a reduced cost of equity capital.     

Do managers listen to the market?

There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll [Roll, R., 1986, “The hubris hypothesis of corporate takeovers,” Journal of Business 59, 97–216.] argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.     

Do managers seek control and entrenchment?

A unique dataset of post-IPO thrifts with heterogeneous initial insider ownership allows us to use revealed preferences to determine the level of ownership insiders believe to be optimal. We find strong evidence that insider ownership converges to the 20% to 30% range, whether insiders begin with diffuse or concentrated ownership. This range of ownership has been found consistent with entrenchment and control in the literature. Our results are robust to a battery of variables related to insider ownership such as moral hazard, adverse selection, market timing, insider characteristics, and firm characteristics. Furthermore, we find that managers with diffuse ownership accumulate shares most aggressively during the period of regulatory anti-takeover protection, consistent with an entrenchment motive. We find that managers with above-average pay are more likely to seek higher ownership, consistent with the existence of private benefits of control. Finally, we find that insider ownership determines equity issuance, leverage, and share liquidity in ways consistent with expected accumulation or reduction in insider ownership for control purposes.     

Do time deposits prevent bank runs?

In this paper the Diamond and Dybvig (J. Politic. Econ. 91 (1983) 401) model is extended by small consumption shocks; that is, an agent may encounter either a small shock or a big (full) shock. We show that a bank can issue liquid demand deposits and still avoid panics, if it also issues time deposits, which have a low liquidation value. Each agent splits his endowment between the two deposit types. If an agent later encounters a small, common consumption shock he withdraws demand deposits, whereas a big, rare shock requires that time deposits are also liquidated. Agents who withdraw only demand deposits benefit from liquidity.     

Do bank managers use securitization gains to smooth earnings in the post- FAS 166/167 period?

Previous literature has documented that securitization gains were used for income smoothing in the era before FAS 166 and FAS 167,¹ which tightened the requirements for sale accounting for securitizations. Using securitizing bank holding companies, we examine whether FAS 166/167 has reduced this income smoothing behavior. Our findings include two facets. First, at the aggregate level, time series statistics show that both the frequency of non-zero securitization gains reported and the magnitude of reported securitization gains are significantly reduced in the post- FAS 166/167 period. Second, at the firm level, our regression results indicate that even though the extent of this income smoothing behavior decreased after the issuance of FAS 166/167, securitization gains continue to be used to smooth earnings by securitizing banks in the post-FAS 166/167 period. Overall, our findings convey that FAS 166/167 has reduced the securitization gains recorded by banks but that after the regulation, banks still use securitization gains to smooth earnings.     

Do shareholders punish or reward excessive CSR engagement? Moderating effect of cash flow and firm growth

Although extensive past research has studied the connection between corporate social responsibility (CSR) and firm value, it has rarely discriminated between optimal and excessive CSR. Thus, we addressed this issue by examining whether shareholders punish or reward excessive CSR engagement through the moderating effect of cash flow and firm growth. We applied country–industry–year fixed-effects (FE) regression to a cross-country sample of 43,803 firm-year observations between 2002 and 2019. The findings show that while both optimal and excessive CSR increase firm value, optimal CSR has greater value relevance than excessive CSR for shareholders. However, although cash flow positively moderates the relationship between optimal and excessive CSR and firm value, firm growth negatively moderates this relationship. The findings are robust regarding alternative CSR proxies, industry-adjusted firm value measures, public governance indicators, and endogeneity concerns.     

Do mutual fund managers time market liquidity?

This paper examines mutual fund managers' ability to time market-wide liquidity. Using the CRSP mutual fund database, we find strong evidence that over the 1974–2009 period, mutual fund managers demonstrate the ability to time market liquidity at both the portfolio level and the individual fund level. Liquidity timing predicts future fund performance and the difference in the risk-adjusted returns between top and bottom liquidity-timing funds is approximately 2% per year. Funds exhibiting liquidity-timing ability tend to have longer histories, higher expense ratios, and higher turnover rates.     

Do negative interest rates affect bank risk-taking?

We offer early evidence on the impact of negative interest rate policy (NIRP) on banks’ risk-taking. Our primary result shows banks in NIRP-adopter countries reduce holdings of risky assets by around 10 percentage points following implementation of NIRP in comparison to banks in non-adopter countries. We augment this result by identifying NIRP’s impact on other aspects of banks’ risk-taking behaviour; NIRP is associated with reductions in banks’ loan growth and average loan price (by 3.7 percentage points and 59 basis points) and a rebalancing of asset portfolios towards safer assets. Secondly, we find the NIRP-effect is heterogeneous; post-NIRP risk-taking increases at strongly capitalised banks and at banks operating in less competitive markets that exploit market power to insulate net interest margins and profitability. Our robust empirical evidence supports the “de-leverage” hypothesis which suggests that banks acquire safer, liquid assets to bolster their capital positions rather than searching for value by acquiring riskier assets. We base our evidence on a sample of 2,584 banks from 33 OECD countries across 2012 to 2016, and from models that employ a difference-in-differences framework.     

Do stress tests affect bank liquidity creation?

We examine the impact of Federal Reserve stress tests from 2009 to 2016 on U.S. bank liquidity creation. Empirical results show that regulatory stress tests have a negative effect on both on-and off-balance sheet bank liquidity creation and asset-side liquidity creation. As banks enter the stress tests, they reduce their liquidity creation to avoid failing the stress tests. These results are consistent with the hypothesis that banks manage their risk exposures to meet higher capital requirements. The negative effect of stress testing on liquidity creation continues to persist in the quarters after the stress tests. Finally, stress test banks appear to increase liability-side liquidity creation. These findings highlight that the enhanced financial stability from greater regulatory scrutiny may be achieved at the expense of financial intermediation.     

Do bank regulation,supervision and monitoring enhance or impede bank efficiency?

The recent global financial crisis has spurred renewed interest in identifying those reforms in bank regulation that would work best to promote bank development, performance and stability. Building upon three recent world-wide surveys on bank regulation (,  and ), we contribute to this assessment by examining whether bank regulation, supervision and monitoring enhance or impede bank operating efficiency. Based on an un-balanced panel analysis of 4050 banks observations in 72 countries over the period 1999–2007, we find that tighter restrictions on bank activities are negatively associated with bank efficiency, while greater capital regulation stringency is marginally and positively associated with bank efficiency. We also find that a strengthening of official supervisory power is positively associated with bank efficiency only in countries with independent supervisory authorities. Moreover, independence coupled with a more experienced supervisory authority tends to enhance bank efficiency. Finally, market-based monitoring of banks in terms of more financial transparency is positively associated with bank efficiency.     

Do dividends signal safety? Evidence from China

Our paper examines whether dividends convey information about future cash-flow volatility in the Chinese stock markets. We observe that dividend changes are followed by cash-flow-volatility changes in the opposite direction. Taking advantage of the unique context of China, we show, in both the two-way sorting analysis and the regression analysis, that the strong relation between changes in dividend and cash-flow volatility is robust after controlling for potential confounders, including firm-level financial market frictions, macroeconomic and market conditions, and government intervention in firms' decision-making, and holds after we control for endogeneity concerns. Furthermore, we perform the theoretic mechanism tests of the relation and present supporting evidence on the signaling theory under the setting of asymmetric information, instead of the free cash flow theory based on the assumption of agency conflict. This study enriches our understanding of the source and nature of cash-flow information contained in dividends.     

Do more able managers provide better non-GAAP earnings?

This paper investigates whether managerial ability is associated with non-GAAP earnings quality. I find that the quality of non-GAAP earnings is greater for high-ability managers than low-ability managers. I also find that investors consider non-GAAP earnings released by high-ability management to be informative. Additional tests show that the positive association between managerial ability and the quality of non-GAAP earnings is stronger when return volatility or managerial stock ownership is greater. The results are robust to alternative measures of managerial ability and non-GAAP earnings quality and to controlling for endogeneity bias. Overall, this paper provides evidence that managers of high ability use non-GAAP reporting as a signalling tool to reduce information asymmetry.     

Do core and non-core cash flows from operations persist differentially in predicting future cash flows?

This study investigates the persistence of cash flow components (core and non-core cash flows) using a cash flow prediction model. By extending the Barth, Cram, and Nelson (Account Rev 76(January):27–58, 2001) model, we examine the role of cash flow components in predicting future cash flows beyond that of accrual components. We propose a cash flow prediction model that decomposes cash flows from operations into core and non-core cash flow components that parallel the presentation and format of operating income from the income statement. Consistent with the AICPA and financial analysts’ recommendations, and as predicted, we find that core and non-core cash flows defined in our paper are differentially persistent in predicting future cash flows; and these cash flow components enhance the in-sample predictive ability of cash flow prediction models. We also analyze the association of in-sample prediction errors with earnings, cash flow and accruals variability. We find that disaggregating cash flows improve in-sample prediction, especially for large firms with high cash flows and earnings variability.

Does free cash flow problem contribute to excess stock return synchronicity?

We investigate whether Jensen’s free cash flow problem contributes to excess stock return synchronicity. We find that low-growth firms with high free cash flow have greater stock return synchronicity. These firms also engage in earnings management to lower their disclosure quality. To the extent that free cash flow for low-growth firms provides corporate insiders an opportunity to extract private control benefit, our findings lend direct and concrete support to Jin and Myers (J Financ Econ, 79:257–292, 2006) prediction that insiders increase opaqueness to capture cash flow beyond the level expected by outsider investors. We identify Jensen’s free cash flow problem as an important driver for stock return synchronicity.     

Why do firms save cash from cash flows? Evidence from firm‐level estimation of cash–cash flow sensitivities

We construct firm‐level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced‐form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.     

Information asymmetry and investment–cash flow sensitivity

Models of capital market imperfections predict that information asymmetry decreases firm investment and increases the sensitivity of investment expenditures to fluctuations in internal funds. Previous empirical tests of the link between investment and financing decisions have relied on indirect measures of financial constraint due to market frictions. In contrast, we use more direct measures derived from the market microstructure literature. Consistent with the theoretical predictions, our analysis shows that scaled investment expenditures are on average lower and the investment–cash flow sensitivity is greater when the probability of informed trading is high. Our results are robust to alternative measures of informed trading and liquidity, but they are not pervasive in our sample.     

Investment–cash flow sensitivity and investor protection

We examine the role of country-level legal investor protection (i.e., shareholder and creditor protection) on firm investment–cash flow sensitivity (ICFS). Using underexplored research data on investor protection across 21 countries and working with a conservative empirical design, we extend prior literature on the relation between investor protection and ICFS and provide new evidence on how these country-level attributes interact to explain a firm's ICFS. We find that either the strong legal protection of minority shareholders or the strong legal protection of creditors reduces the sensitivity of investment to internal cash flow. However, in countries with strong levels of both minority shareholder and creditor protection, ICFS increases. Our results remain robust after controlling for several alternative explanations. The results support the argument that overregulation arises when policymakers increase investor protection at levels that lead firms to avoid external sources of finance, hampering firm investment. Our findings suggest that countries face a regulatory trade-off such that increasing investor protection (either shareholder or creditors protection) enhances financial markets efficiency, but excessive regulation can indeed lead to financial markets inefficiencies.     

Do managers withhold bad news from credit rating agencies?

Research documents that managers, on average, withhold bad news and emphasize good news in their public disclosures. We ask whether the same is true in their private communications with credit rating agencies. We study how rating agencies anticipate and react to public information events as a function of their access to rated firms’ private information. We show that, in terms of ratings downgrades, rating agencies exhibit relatively more anticipation and less reaction to negative (compared to positive) public information events when they have more access to private information. Our results are strongest when firms are most optimistic in their public disclosures and are not due to rating agencies focusing their efforts on downside risk. Overall, we find consistent evidence that rated firms provide less optimistic information to rating agencies in their private communications and that this information is reflected in credit ratings.