Earnings quality,bankruptcy risk and future cash flows

Prior research suggests that the quality of accruals may be compromised where the magnitude of accruals is abnormally high, due to the presence of errors in the accruals‐estimation process (Dechow and Dichev, 2002; Richardson, 2003). A consequence of this is that abnormal accruals may not map into realised future cash flows to the extent that would normally be expected of accruals data. Indeed, the association may be insignificant if abnormal accruals consist primarily of estimation noise. Our study investigates whether abnormal accruals for UK firms provide incremental insight into future cash flows. In particular, our paper may be viewed as a development of Subramanyam (1996). We find a significant positive association between abnormal accruals and one‐year‐ahead operating cash flows. This provides a rationale for the pricing of abnormal accruals by the market (Subramanyam, 1996; Xie, 2001) and suggests that abnormal accruals are not merely the products of noise in the accruals‐estimation process. However, our results are conditional upon the probability of one‐year‐ahead bankruptcy risk (Charitou et al., 2004). We also find that abnormal accruals possess small but significant explanatory power for future cash flows even when controlling for the disaggregation of accruals into individual items (Barth et al., 2001).     

Independent director reputation incentives,accruals quality and audit fees

While prior research provides abundant evidence that independent directors are associated with favorable outcomes, researchers have only recently started to investigate the impact of independent director reputation incentives. This study examines whether the reputation incentives of independent directors are associated with accruals quality and audit fees. The results reveal a negative relationship between the proportion of independent directors with relatively low reputation incentives and accruals quality. Further, the proportion of independent directors with relatively low reputation incentives is positively associated with audit fees, suggesting that auditors view lower reputation incentives as increasing risk. We also find that Big 4/5 auditor office size moderates the relationship between independent director reputation incentives and audit fees. Specifically, our results indicate that audit fees increase less in response to lower reputation incentives as office size increases, suggesting that larger offices respond to the risks associated with lower reputation incentives more efficiently than smaller offices.     

The role of accruals and cash flows in explaining security returns: Evidence from New Zealand

This paper empirically examines the relative and incremental information content of earnings and cash flows and the role of firm-specific contextual factors in moderating information content in New Zealand. Accounting earnings are considered to be the premier information source for decision making and a substantial volume of literature, primarily in the United States, shows that earnings provide superior information to that of cash flows. However, significant reporting differences in New Zealand warrant and investigation of the role of earnings and cash flows to explain security returns. Results show that (a) earnings have higher explanatory power than cash flows, although the difference is not statistically significant, and (b) both earnings and cash flows have incremental information content for stock returns. Further analysis shows that the valuation role of earnings and cash flows is moderated by firm-specific factors.     

The value relevance of cash flows, current accruals, and non-current accruals in the UK

Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements—providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms—is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.     

Further evidence of the relationship between accruals and future cash flows

Focusing only on operating accruals in accrual‐based studies results in a loss of information and noisy measures of both accrual and cash flow components of earnings. Thus, we examine the relative importance of working capital accruals, non‐current operating accruals, and financing accruals with regard to future cash flows from operations (CFO). Using Australian data, we provide evidence that both working capital and non‐current operating accruals are important for explaining future CFO but that the contribution of financing accruals is not significant. Moreover, the asset component of accruals plays a more important role in explaining future CFO than the liability component.     

Auditor quality,corporate risk,and the valuation of new issues

This paper tests two hypotheses derived from the Data et al. (1991) theoretical model of auditor choice by companies newly listing on the stock exchange. The results offer support to their predictions of the demand for auditor quality. In particular, higher-risk companies are associated with the selection of a high-quality auditor, as proxied by a Big Eight firm of accountants. Additionally, companies who employed Big Eight firms had higher market valuations of their stock at the time of listing.     

Interfirm differences in earnings variability: an analysis of fundamentals,cash flows and accruals

Prior research shows that the time‐series variability of corporate earnings affects forecasting accuracy and corporate risk, yet little is known about the determinants of earnings variability. This study analyses interfirm differences in earnings variability. Large‐sample evidence shows how the ratio of accrual variability to cash‐flow variability varies across a cross‐section of firms and how these components and the correlation between contemporaneous cash flows and accruals are related to key economic fundamentals.     

Distortion effects and extreme observations in empirical research: An analysis of the incremental information content of cash flows

Linear regression models are used in a number of studies examining the presence or absence of incremental information content in cash flows. The results of these studies are not consistent. This paper provides evidence of the impact that extreme observations can exert on parameter estimates in a regression model. Two techniques commonly used to address the problem of extreme observations are considered. These techniques, winsorising the data and trimming the data, are compared to a regression diagnostic technique, Cook's distance. The comparison of these techniques provides evidence that the choice of technique can determine the significance or otherwise of regression results. This paper concludes that the inconsistency in reported results examining the incremental information content in cash flows may be attributed to the techniques adopted to address the issue of extreme observations.     

The determinants and valuation effects of classification choice on the statement of cash flows

In this paper we exploit the choice allowed by International Financial Reporting Standards (IFRS) regarding the presentation of interest payments on the cash flow statement to answer two related questions: First, whether the classification choice is explained by firm reporting incentives and second, whether it is value relevant. Using a UK sample, we find that firms reporting losses, with a greater proportion of their debt stemming from public sources, with CFO-based covenants and greater increases in leverage in the year of adoption are less likely to report interest payments in cash flows from operating activities (CFOA). Results also suggest that the incentive to meet or beat analyst CFO forecasts decreases, but strong corporate governance increases the probability of including interest payments in CFOA. Based on the assumption that the decision not to classify interest payments in CFOA captures lower disclosure quality or poor future expected performance, we posit that these firms should also exhibit lower valuations. Results obtained after correcting for self-selection bias confirm this assertion. We conclude that managers’ decision not to classify interest payments in CFOA is consistent with the opportunistic use of the choice allowed by IFRS.     

The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: a re‐examination and extension

We examine whether the components of accruals and operating cash flows improve the predictive ability of earnings for forecasting future cash flows. Unlike most previous studies, we avoid data estimation errors and sample self‐selection bias because we exploit data from Australia where reporting of actual cash flow components had been mandatory since 1992. We show that accrual components and operating cash flow components together are more useful than (i) earnings, (ii) operating cash flows and total accruals and (iii) the combination of operating cash flows with accrual components in forecasting future cash flows. These results are robust to several contextual factors, including the length of the operating cash cycle, industry membership, firm profitability and firm size.     

中央国库现金管理中标利率与货币市场利率关系的实证分析

文章在梳理中央国库现金管理发展及货币市场利率体系的基础上,采用协整方程和误差修正模型实证检验了中央国库现金管理中标利率与同业拆借利率和回购利率之间的协整关系,研究表明其与二者均存在长期协整关系,误差修正模型的调整力度为0.8。文章分析了这种长期趋势存在的现实原因。最后结合实证分析中样本出现的特点,就进一步完善中央国库现金管理提出建议。     

On the relationship between exchange rates and equity returns: A new approach

This paper employs a new approach in order to investigate the underlying relationship between stock markets and exchange rates. Current approaches suggest that the relative equity market performance of two countries is linked to their exchange rate. In contrast, this study proposes an alternative approach where one global variable – global equity market returns – is believed to have an effect on exchange rates, with the relative interest rate level of a currency determining the sign of the relationship. Our empirical findings suggest that exchange rates and global stock market returns are strongly linked. The value of currencies with higher interest rates is positively related with global equity returns, whereas the value of currencies with lower interest rates is negatively related with global equity returns.     

The influence of growth opportunities on the relationship between equity ownership and leverage

This study investigates whether the association between ownership structure and leverage varies with the magnitude of growth opportunities. According to the free cash flow hypothesis, managers receive utility from increasing firm size and the over-investment problem is more severe for firms with fewer growth opportunities. Considering the disciplinary role of leverage on the over-investment problem and ownership structure as a control mechanism to affect financing decisions, we hypothesize that the association between ownership structure and leverage is stronger for firms with fewer growth opportunities. We find that the association between equity ownership and leverage is significant for low-growth firms, but not for high-growth firms. The results mostly hold when sample firms are partitioned into large and small firms to directly control for the effect of firm size on the association between ownership structure and leverage.

江浙沪二省一市银行结算账户及资金往来分析

江浙沪两省一市作为地域相连、文化相近、结构互补的较为完整的城市经济区域,是我国经济发展的重心区,并将继续对我国未来的经济发展产生越来越大的影响。本文试图通过采用人民币银行结算账户管理系统及支付管理信息数据,对江浙沪二省一市银行结算账户流入流出、单位存款人的行业归属及资金往来情况进行实证比较分析,来提出推动长江三角洲地区金融一体化的决策依据。     

The Incremental Information Content of Accruals: Evidence Based on the Exponential Smoothing of Levels and Trends in Pre-Tax Earnings, Funds Flow and Cash Flow

By arranging the accrual accounting identity as a hierarchy of market response models, this paper investigates whether current and noncurrent accruals have incremental information content beyond earnings. The results indicate that the increase in explanatory power attributable to funds flow and cash flow disclosure can be improved upon by estimating the surprises in reported numbers by exponentially weighting prior values. The unexpected information simplifies to the weighted sum of deviations from the estimated level and estimated trend. Further improvements are obtained by allowing components of the error to vary with time and by company in a non-autoregressive, homoscedastic pooling scheme which takes account of the joint presence of time series disturbance and cross sectional disturbance.     

The relevance of earnings and cash flows in a heavily regulated industry: Evidence from the Greek banking sector

This study examines the informational quality of annual accounting earnings within Greek banking institutions taking into consideration the most significant risks facing by such firms and specifically interest rate risk, credit risk, liquidity risk and solvency risk, alongside with the persistence of earnings and bank size as significant determinants of ERCs. Data analysis over a period of ten years (1995-2004) revealed that earnings have higher incremental importance in explaining stock return movements compared to cash flows since earnings change has been found to affect stock returns positively. Additionally, interest rate risk has a positive but not significant impact on the return-earnings relation but on the contrary solvency risk, credit risk and liquidity risk proved to have a negative impact on the valuation process for both small and big-sized banks. Finally, tests on the incremental informativeness of cash flows when earnings are transitory provide significant results suggesting that investors seek for alternative measures of banks' performance when earnings are characterized by increased extremity but inversely cash flows and earnings seem to be equally value relevant when investors evaluate big-sized banking institutions. The results are generally robust to the specification of the empirical models and the research design employed in our study.     

Strategic returns to international diversification: An application to the equity markets of Europe,Japan and North America

We undertake a decomposition of the risk factor loadings of 15 national stock market returns from 1972 to 1990, using a variant of the Campbell-Shiller (1988) linearisation. (Campbell, John Y. and Shiller, Robert J., ‘The dividend-price ratio and expectations of future dividends and discount factors’, Review of Financial Studies, Vol. 1, 1988, pp. 195–228.) We find considerable variation among countries in the relative importance of a cash flow component and a discount rate component in determining the beta with the world equity index return and with other risk factors. Also, the substantial international heterogeneity in factor loadings suggests that a global portfolio allows ample hedging opportunities, presumably deriving from differences in underlying economic structure.     

On the asymmetric relationship between stock market development,energy efficiency and environmental quality: A nonlinear analysis

It has been widely documented in the literature that financial development drives up the impact of CO₂ emissions through increases in real economic activities and the consumption of polluting fossil fuel energy. However, when dealing with stock market development, such upward effects on economic growth, energy efficiency, and carbon emissions seems to give away to a positive impact especially in emerging markets. This paper contributes to this debate by exploring both the symmetric and asymmetric responses of CO₂ emission to changes in stock market development indicators. Using both the panel linear and nonlinear ARDL, our results demonstrate the asymmetric effects of stock market development indicator son carbon emissions in the context of emerging markets. In particular, the long-run elasticities results suggest that positive and negative shocks on stock market indicator decreases environmental quality by increasing carbon emissions. Based on these empirical findings, this study offers some crucial policy implications. Especially, policy makers should implement strong environmental policies in emerging markets economies to reduce carbon emissions of industrial companies without significantly affecting the development of financial markets.     

The role of accountability in determining the relationship between financial reporting quality and the performance of public organizations: Evidence from Vietnam

Drawing on the new public management and agency theory, this study examines the mediating role of accountability in the relationship between financial-reporting quality and the performance of public organizations. The research model and hypotheses tested with a survey of 177 responses obtained from accountants and managers working in the public sector in Vietnam. Our analysis shows that accountability has a mediating role on the relationship between financial-reporting quality and performance, with significant implications for public organizations seeking to improve both their financial-reporting quality and their organizational performance with better designed systems of accountability.