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Purpose The purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision. Design/methodology/approach This study used the GMM system estimators with the Malaysian data for the period of 1992-2009 to fit a standard partial adjustment model and to estimate the speed of adjustment (SOA) of capital structure. Findings This study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7 percent annually and this rate increased to 14.2 percent when the timing variable is accounted for. Moreover, the SOA is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged are lower and hence, these firms have more flexibility to time the market. Research limitations/implications The findings of this study support that firms consider both targeting and timing in their financing decisions. No standalone theory can interpret the full spectrum of empirical results. The empirical work is based on partial adjustment model of leverage; however, this model has been criticized by inability to distinguish between active adjustment behavior and mechanical mean reversion. This is an avenue for future research. Originality/value This study investigates if targeting and timing behaviors are mutually exclusive as theoretically expected or they can coexist. A theoretical explanation and an empirical investigation support the conclusion that firms consider both targeting and timing in their financing decisions. This study provides evidence from Malaysian firms that are characterized by concentrated ownership structure and separation of cash flow rights and control rights of the firm due to pyramid ownership structure. Therefore, it provides evidence on how environmental characteristics may affect the capital structure determinants of the firm.

This paper finds positive evidence of return predictability and investment gains for individual corporate bonds for an extended period from 1973 to 2017. Our sample consists of both public and private company bond observations. We have implemented multiple machine learning methods and designed a Fama-Macbeth-type predictive performance evaluation. In addition to robust predictability evidence, there are four main findings. First of all, we find the lagged corporate bond market return as the most important predictor, suggesting a short-term market reversal story. Second, this paper concludes that equity information is conditionally redundant for similar public and private company bond performance. Third, a model-forecast-implied long-short strategy delivers 1.48% monthly returns and 1.4% alpha during the last two decades, which substantially drops if we do not consider private company bonds. Finally, the return predictability is mainly due to the cash flow component instead of the discount rate component.

We investigate the sources of time-variation in the stock-oil correlation over the period 1983-2019. We first derive a novel oil futures return news decomposition following Campbell and Shiller (1988) and Campbell (1991). Then, for both stock and oil, we split unexpected returns into cash flow news (which can be related to asset-specific fundamentals) and discount rate news (which can be driven by shocks to investors holding both assets) using a vector autoregressive (VAR) model. We find that about 79% of the time-varying correlation is related to the comovement of cash flow news between the two assets. This result is robust to different specifications of the VAR model used to decompose returns. We provide supportive evidence that underlying changes in the structure of the real economy, such as the increased oil production in the U.S., are key drivers for the changing stock-oil comovement beyond the financialization of commodities.

Environmentally-sustainable investment can impact firm financial performance through multiple channels. We concentrate on disentangling the related cash flow and valuation impacts. By using an instrumental variable approach, we find that U.S. REITs with a more environmentally-sustainable portfolio attract premiums to their market valuation beyond operating benefits, carry lower systematic risk, and are subject to less uninformed trading (for office and retail portfolios). Such firms also experience both higher asset-level rental revenues and net operating income, and lower interest costs. Importantly, the equity market premium exceeds the property market premium, which is partially explained by reputational effects. Results also confirm valuation findings in office and retail portfolios.

Project cash flows and modified cash flows are presented in an illustrative graphic within Excel for the live or virtual classroom. Further, the graphic computes and displays the relevant modified internal rate of return (MIRR) and modified net present value (MNPV), with associated formulas. The presentation allows for a discussion of the reinvestment assumption attributed to the internal rate of return (IRR) and the net present value (NPV) calculations.

The dividend (Gordon) growth model (DGM) is a simple stock valuation equation in four variables: (1) price; (2) next-period cash flow; (3) a perpetual and constant rate of growth in the periodic cash flow; and (4) a perpetually-constant discount rate. The DGM can be expressed to equate the perpetually-constant discount rate to the cash flow yield on the current price plus the perpetual growth rate in the periodic cash flow. But that expression would provide a reliable estimate of a real-world discount rate only if both the cash flow yield and the growth rate used as inputs to the model were perpetually constant. In rate-regulation proceedings, however, utility expert witnesses use the DGM with current (not perpetual) dividend yields and analysts' 3-5 year (not perpetual) earnings growth rates. This practice contributes to approved equity cost of capital awards above plausible cost of capital estimates, shifting wealth from rate payers to utilities.

The purpose of the paper is to examine financing payout behavior of Indian firms. Specifically, the reliance of Indian firms on capital markets to finance their discretionary payouts (DCP) is explored using data of S&P BSE 500 firms for the sample period from 2010 to 2020. This study reports several new findings for the payout policies followed by Indian firms. First, dividend payouts are not disappearing in India because dividend payout ratio and share repurchase ratio for Indian firms are found to increase during the sample period. Second, rupee magnitude of dividend payments and percentage of firms paying dividends are also increasing. Third, the financing of DCP shows that firms finance DCP mostly with debt and occasionally with equity. Fourth, firm characteristics namely size, excess leverage, excess cash, market-to-book ratio, R&D (only for debt financing), managerial ownership, cash flows, and credit rating influence financing of DCP with debt and equity issuance. Lastly, business cycle conditions are shown to influence debt financed DCP. Overall, the findings run counter to existing studies which state that dividends are disappearing because this study finds evidence of increasing dividends among Indian firms and provides insights to practitioners and academicians on the financing of payout policy in India.

We propose the following structured approach to asset allocation: all assets and liabilities in any portfolio should be thought of as means contributing to the following four ends: • Liquidity maintenance: nominally safe and quickly accessible “cash-like” pool of assets, • Income generation: relatively regular, certain and near-term cash payments, • Preservation of (real) capital: assets expected to retain their value over time, • Growth: more volatile assets and strategies expected to generate future cash payments. We believe that all 4 areas should be “powered,” giving our approach its 4×4 name. Further, we suggest that investors should start their asset allocation process by explicitly setting a strategic investment horizon over which they seek to achieve their goals, and building strategic 4×4 portfolios. Investment portfolios should then be rebalanced with some regular tactical frequency in order to re-align with the strategic investment horizon goals, while also managing tactical risk, return, and cash flows.

Using firm-level climate change exposure data, we show that firms significantly increase their cash holdings in response to increases in climate changes. Our results are robust to using alternative climate change measures and alternative cash ratio measures. We present that the increase in cash holdings is more pronounced in firms with higher financial constraints, higher cash flow volatility, and less cash resilience. We further find that, after Paris Agreement, firms exposed to more climate changes hoard more cash. We also find that firms in more vulnerable industries increase cash holdings more than firms in other industries.

The financial statements are used for financial analysis to analyze the performance of an organization for a specific period. This research aimed to analyze the financial stamen of an organization for analyzing its financial performance. The report had chosen ADNOC as the case organization. The study has used the quantitative data obtained from the financial statements of ADNOC to collect ratios. The ratio analysis shows that all ratios i.e. profitability, liquidity, debt, and cash flow ratios depicted the favorable position of ADNOC while activity ratios show the unfavorable position. The investors, in the end, are recommended to invest in ADNOC.

Carbon capture and storage stakeholders focusing on transport and storage aspects need to consider a wide range of risks and uncertainties when making investment decisions, including market, regulatory, geological and technical risks and uncertainties. This paper presents a stochastic optimisation based real options valuation framework that can be implemented to model CO2 pipeline transport and storage network costs in which uncertainties and engineering flexibilities are appraised, optimised and factored into the investment decisions, so that investors or regulators can confidently and quantitatively evaluate incentives that can support CCS deployment at large scale. The paper describes the models developed for this purpose and demonstrates the application of the modelling framework for a realistically designed CO2 storage cluster around Rotterdam in the Netherlands. It shown that the CCS network evolution is mainly driven by geological and regional geography constrains, CO2 supply rates, and the engineering designs relying on these. It has also been shown that individual storage sites have significantly different cash flows, dictated by their physical characteristics and the injection concept chosen. The storage capacity uncertainty and CO2 supply uncertainty (or CO2 mitigation target uncertainty) have been identified as the main uncertainties affecting a CCS network cluster.

We introduce a novel data set to analyze the impact of the Covid-19 crisis on SME cash flows. The crisis led to a sharp drop in economic activity in the UK, which hit SMEs harder than larger businesses. The data set comprises monthly information on all 2 million SMEs that have current accounts or debt with nine major banking groups, with roughly 5 billion data points in total. We document a few basic facts on UK SME cash flows during Covid-19. (1) The virus and the public health interventions coincided with a 30 percentage point reduction in turnover growth for the average SME. (2) There was significant heterogeneity in the turnover shock across SMEs, with the biggest reductions for younger SMEs in consumer-facing sectors in Scotland and London. (3) Cash flows were broadly flat on average and there was much less heterogeneity across SMEs. (4) SMEs with average turnover growth in 2020 were most likely to use the main government-guaranteed loan scheme for SMEs, as well as those in the hospitality sector in more affluent areas of the country. Our analysis provides a framework to monitor SMEs as the sector recovers from the pandemic.

Viaticals are life insurance settlement contracts where the investor purchases a life insurance policy from a terminally ill policyholder. In these cases, the present value of the policyholder’s cash flows is substantially above the cash surrender value and below the face value of the policy. The COVID-19 virus (also referred to as SARS-CoV-2 or the coronavirus) has killed and shortened the expected lifespan of many victims, much like HIV-AIDS and other terminal illnesses. This paper suggests a valuation model for a life settlement contract as the framework to contrast the usefulness of viatical contracts during the current COVID-19 pandemic compared to the HIV/AIDS crisis. Contrasting the diseases leads us to believe that viaticals are less useful for dying COVID-19 victims, although they may prove useful for a subset of COVID-19 survivors who suffer life-shortening organ damage.

We study the classical relationship between a firm’s investment and Tobin’s q for which unobserved productivity is another factor of a firm’s decision. Besides the potential measurement problem of Tobin’s q, controlling unobserved productivity is a new challenge. We develop an econometric method that tackles both issues given timing and information set assumptions. Using 15,079 unique public firms in the U.S. for the period of 1975 to 2017, we find that cash flow remains a significant factor of investment even after controlling for the productivity and that investment becomes less sensitive to q and more sensitive to cash flow.

This paper analyses the local lockdown measures introduced to contain the spread of Covid-19 in the UK. We use a spatial regression discontinuity design to assess whether the fall in business activity during the lockdowns was driven by the policy measures or by other factors, such as voluntary social distancing. We conclude that the local lockdowns did causally reduce business activity but that activity would have probably fallen substantially even in the absence of the lockdowns. During the local lockdowns, the average turnover growth for SMEs in the UK was around -20%. SMEs that were up to two kilometres inside the lockdown boundaries had 8 percentage points lower turnover growth than those up to two kilometres outside. This implies that the local lockdowns accounted for two fifths of the overall drop in business activity at most. The estimates are largest for restaurants and non-food retail (eg clothes shops), which were directly targeted by the restrictions. Costs fell by much less than turnover, reducing cash flow.

Using a novel combination of empirical tools and analyses, we demonstrate that if a female director is unlikely to have any personal power or influence on the board, her addition to the board will have no significant impact on firm risk-taking and performance. However, with increasing power/influence on the board (via greater numerical strength or non-token aggregate position), female directors will tend to reduce the excessive risk-taking behavior of the firm and, to the extent that the gender-diversification process is non-disruptive, this effect can feature significant increases in profitability and firm value. We also show that the increases in profitability and firm value are driven not by the market timing of equity issues but by the sale of less productive physical assets, more retained earnings, paid-down debt, and less cash flow volatility. Overall, our results show that board gender diversity affects corporate risk-taking culture and firm performance in a value-maximizing manner, mainly when gender diversification is non-tokenistic and non-disruptive.

The outbreak of the Covid-19 pandemic massively increased uncertainty about firms’ cash flows and their access to financial markets. We examine its effect on firms’ strategies for preserving cash by suspending dividends and buybacks and raising new funds through bond and equity issues. We identify key firm and stock characteristics that help explain a large portion of the cross-sectional variation in firms’ payout and financing decisions and show that the expansive monetary policies pursued by the Federal Reserve in the early phase of the pandemic crucially affected the timing and sequencing of these decisions.

Managing the company’s finances has always been a top concern of business entities. As a result of pandemic regulations, conditions for doing business became worse and many small and medium-size businesses faced serious financial problems. The issue of survival was on the agenda for the companies that couldn’t cope with modern challenges.

Financial advisors use questionnaires and discussions with clients to determine a suitable portfolio of assets that will allow clients to reach their investment objectives. Financial institutions assign risk ratings to each security they offer, and those ratings are used to guide clients and advisors to choose an investment portfolio risk that suits their stated risk tolerance. This paper compares client Know Your Client (KYC) profile risk allocations to their investment portfolio risk selections using a value-at-risk discrepancy methodology. Value-at-risk is used to measure elicited and revealed risk to show whether clients are over-risked or under-risked, changes in KYC risk lead to changes in portfolio configuration, and cash flow affects a client's portfolio risk. We demonstrate the effectiveness of value-at-risk at measuring clients' elicited and revealed risk on a dataset provided by a private Canadian financial dealership of over 50,000 accounts for over 27,000 clients and 300 advisors. By measuring both elicited and revealed risk using the same measure, we can determine how well a client's portfolio aligns with their stated goals. We believe that using value-at-risk to measure client risk provides valuable insight to advisors to ensure that their practice is KYC compliant, to better tailor their client portfolios to stated goals, communicate advice to clients to either align their portfolios to stated goals or refresh their goals, and to monitor changes to the clients' risk positions across their practice.

Investment risk is addressed from the perspective of long-term investors, with key concepts being discussed and methods outlined for evaluating risk over long horizons. The main themes include: the need to focus on shortfall versus objectives and sources of sustained loss, rather than return volatility; the potential influence of path dependence; and the benefit of directly modelling the wealth accumulation process. A framework is presented that decomposes the drivers of wealth accumulation into initial expected returns, discount rate risk, cash flow risk and reinvestment risk. Approaches are highlighted for forming distributions of accumulated wealth, while demonstrating the importance of incorporating prevailing market conditions into any risk analysis. Alternatives to the Standard Risk Measure used for Australian superannuation funds are discussed.

This paper explores how cash mitigates predictable and unpredictable adverse cash flow shocks to firms using the financial data of Japanese firms. We find that (i) cash has no value after the predicted shock regardless of the severity of the financial constraint, (ii) after the unpredicted shock, the value of cash for the financially constrained firms is larger than that for the unconstrained firms, and (iii) the value of cash is similar between the two shocks for the unconstrained firms, while the value is larger when the unpredicted shock occurs than when the predicted shock occurs for the constrained firms.

Embedding securities token offering (STO) within a law and a regulatory framework is critical for its market to develop with investor confidence. The UK’s Financial Conduct Authority (FCA) current laws and regulations, which were designed for the initial public offering (IPO) market, are assessed for suitability in an STO market that aims to bring investors closer to issuers and to increase access to finance. UK Company law is then used as a framework to identify risks to investors’ economic (cash flow) and political (governance) rights. The analysis provides guidance for developing smart contracts to implement STO and fulfilling investors’ rights. The findings show the extent to which a self-governing organisation through code-as-law is possible. Furthermore, a comparative analysis with German law shows that although the risks do not only exist in country-specific capital market or company law regulations, other legal systems have neither sufficiently identified many of the risks nor taken them into account in current legislative projects. Finally, the author examines investor’s data rights and argues that they should be recognised as both an economic and a political right. Data dividends should be distributed to security token holders and data governance should ensure that centralised management does not monopolise information to influence token holders’ decision making.

We examine a general equilibrium dynamic economy in which each firm hires a manager who privately observes cash flows and can fire him after poor performance, generating costs to both parties. The contract is terminated when the manager's continuation value reaches his compensation at another firm net of his search cost. The unique competitive equilibrium features overcompensation, short-termism, and excessive executive tenure. When a firm increases executive pay, it increases the cost to other firms to retain their managers, in turn forcing them to raise and front-load their compensation packages. Inefficiencies decrease with the firm's discount rate and increase with the manager's discount rate, the termination cost to the firm, and the proxy for moral hazard. An increase in the search cost to the manager increases social welfare. In the competitive equilibrium, the private optimal contract can be implemented via inside equity relinquished by the manager upon moving to a new firm. Optimal corporate and income tax schedules can generate the social planner's allocation.

Using data from Korea, we show that the second-tier exchange—also known as the entrepreneurial market—assigns higher valuations to growth-oriented (i.e., small yet intangibles-rich) companies despite their low profitability. In contrast, the main board favors companies with stable cashflows and regular payouts to shareholders. The difference between the two exchanges is most pronounced when companies are conditioned on their stage in life cycle as proxied by dividend payments. That is, the “growth” valuation is most evident in earlier-stage companies (i.e., dividend non-payers) of the second-tier exchange while the “cashflow” valuation is strongest in later-stage companies (i.e., dividend payers) of the main board. Further analysis supports the notion that the second-tier exchange distinguishes itself from—and thus complements—the main board by helping keep corporate growth opportunities in stock prices. Conversely, the results indicate that the main board fails to capitalize corporate growth options into firm value, as most companies therein have stable cashflows from unique assets and market position (i.e., economic rents) as the main value driver.

This paper studies the predictability of firm profits using Fama-MacBeth regressions and gradient boosting. Gradient boosting can use more relevant factors and it predicts better. Profits are more predictable at firms that are large, investment grade, low R&D, low market-to-book, low cash flow volatility. Effects on financing decisions, and cross-section of stock returns are studied. During recessions profits are less predictable - particularly non-investment grade firms. Both algorithms produce estimates like those interpreted in the literature as evidence of excessive human optimism during booms and excessive pessimism during recessions.

Option pricing theory explains why collateralized loan obligation (CLO) equity holders should prefer riskier CLO collateral asset portfolios with greater cashflow volatility. The degree to which CLO equity holders are better off with riskier portfolios depends on how well CLO equity is performing or, in option terms, whether CLO equity is in-the-money, at-the-money, or out-of-the-money.

Time value of money calculations are illustrated through developing a timeline with cash flow graphics in Excel. The cash flow graphics can be used in the live or virtual classroom and as a resource for students outside of the classroom. Further, the graphic is readily adjustable to different scenarios making it useful for multiple time value of money topics.

Financially constrained agents discount future cash flows at above-market rates. In this paper, we present the hypothesis that delaying tax payments can materially reduce distortions when agents are credit constrained. We test this hypothesis in the context of the labor supply decisions of young workers in Norway, where a kinked income-contingent student-debt conversion scheme replicates an income tax with delayed payments. Bunching analyses reveal elasticities that are an order of magnitude below those we find at a regular income tax threshold, and which are increasing in ex-ante financial resources. These findings underline the potential for delayed taxation to be a powerful new component of optimal tax policy.

Using survey forecasts, we find that systematic errors in expectations of long-term inflation and short-term nominal earnings growth are the main driver of prices and return puzzles for bonds and stocks. We demonstrate this by deriving and testing a single necessary and sufficient condition based on accounting identities. Errors in expectations of short-term inflation and long-term nominal earnings growth do not play a role in either asset market. Because of these systematic errors, real cash flow expectations closely match aggregate bond and stock prices, leaving little room for time-varying discount rates. These expectations also accurately match key return puzzles for bonds and stocks: the rejection of the expectations hypothesis and stock return predictability. These results are consistent with a simple model in which agents believe the persistences of inflation and nominal earnings growth are magnified versions of the objective persistences.

We study how FDI affects the financial structure of targeted firms, by looking at a sample of foreign acquisitions that occurred in Italy between 1998 and 2016. We show that the entry of foreign investors promotes the diversification of financing sources. Moreover, foreign acquisitions lower investment sensitivity to the availability of bank credit and the cash flow sensitivity of cash, allowing targeted firms to rely more on non-bank external financing channels. Importantly, these effects are stronger for investment in intangible assets. These findings suggest that the positive productivity effects of FDI emphasized in the literature are, at least in part, traceable to enhanced investment in capital that is harder to finance through the banking sector.

If the U.S. is on a fiscally sustainable path, then higher U.S. government debt/output ratios should reliably predict higher future surpluses or lower real returns on Treasurys. In the post-war sample, we find no evidence for this. Neither future cash flows nor discount rates account for the variation in the current debt/output ratio. Instead, the future debt/output ratio accounts for most of the variation. Systematic surplus forecast errors can account for part of these findings. Since the start of the GFC, surplus projections have anticipated a large fiscal correction that failed to materialize. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We investigate how sell-side analysts adjust their earnings forecasts following ESG incidents. We find that following negative ESG news, analysts significantly downgrade their earnings forecasts at all horizons, including long-term. Forecast revisions account for all the negative impact of ESG incidents on firm values, implying no change in the discount rate. The negative revision of earnings forecasts reflects lower expectations on future sales (rather than higher future costs). In Europe, analysts who exhibit a stronger sensitivity to ESG news provide significantly more precise forecasts than their peers.

Soon after the outbreak of the COVID-19 pandemic, many governments began extending financial and other forms of support to micro, small, and medium-sized enterprises (MSMEs) and their workers because smaller firms are more vulnerable to negative shocks to their supply chain, labor supply, and final demand for goods and services than larger firms. Since MSMEs are diverse, however, the severity of the pandemic’s impact on them varies considerably depending on their characteristics. Using online survey data of MSMEs from eight developing economies in South, Southeast, and Northeast Asia, we attempt to deepen our understanding of the impact of the pandemic on MSMEs, especially their employment, sales revenue, and cash flow. We characterize those firms that began participating in online commerce and try to determine how their use of online commerce and their employment are related in this difficult time. We also examine the government support that MSMEs have received and the extent to which it has satisfied their support needs.

We decompose earnings yield into a smoothing component and a stationary residual component to isolate the fluctuations due to variation in expected returns from those due to the change in the forecast of dividend dynamics. The residual component forms a powerful predictor of dividend growth motivated by linking the dividend partial adjustment model to the present-value framework. Empirically, the proposed predictor displays statistically significant in-sample and out-of-sample predictive power for aggregate dividend growth at monthly and annual frequencies, robust in dividend reinvestment strategies, in pre- and post-war data, in good and bad times, and at short and long horizons.

The cash flow estimation is important to evaluate projects in view of adding values to the owners’ equity of a firm. Cash flow estimation is a primary requirement for capital budgeting and using project evaluation techniques. Hence, this paper provides cash flow estimation methods from an accounting perspective to facilitate a reader understand the basics and bases of cash flows estimation with suitable exhibits from an accounting point of view. This paper provides explanations on basic principles of project cash flow estimation, meaning of incremental cash flow, trade-off between the equity and debt capitals used in projects, reason for excluding the cost of financing a project, tax concern, opportunity cost consideration, and the process and methods of estimating cash flows.

Prior literature shows that the zero earnings discontinuity, which illustrates earnings management to avoid small losses, has disappeared in the United States. We examine whether a similar development has occurred in the European Union and find that this is not the case: the discontinuity in Europe is still pronounced and has remained remarkably stable. We hypothesize that the tendency to avoid small losses of close to zero constitutes only one facet of a more general tendency to reduce reported losses in years with negative cash flows, which would result in a less timely recognition of losses than expected under conditional conservatism as embodied in accounting standards. For the United States, we find that loss avoidance in this broader sense follows a similar developmental pattern over time as that of the zero earnings discontinuity. For the last two decades, losses have been recognized in a timelier manner than gains, which is consistent with conditional conservatism. In Europe, in contrast, the asymmetric timeliness of loss recognition is consistently reversed, which suggests that conditional conservatism is overcompensated by earnings management to reduce reported losses. We conclude that the adoption of International Financial Reporting Standards has not resulted in a decline in loss avoidance behavior in the European Union.

The research problem We examine the association between financial reporting quality and trade credit capital for a large sample of European private firms. Furthermore, we explore how information asymmetry and credit rationing moderate the link between financial reporting quality and trade credit financing. Motivation Trade credit constitutes one of the most important sources of financing for private firms. Nevertheless, prior research has provided few and inconclusive evidence of the link between financial reporting quality and private firms’ trade credit capital. Our study is further motivated by the recent calls for more research on the determinants of the relation between financial reporting quality and trade credit financing (e.g., Hope & Vyas ( 2017 )). The test hypotheses H1: There is a positive association between financial reporting quality and private firms’ access to trade credit capital. H2a: The relation between financial reporting quality and private firms’ access to trade credit capital is more positive when information asymmetry and uncertainty about future cash flows are high. H2b: The relation between financial reporting quality and private firms’ access to trade credit capital is more positive when credit is rationed. Target population Policymakers who seek to improve accounting standards and customize them to the financial reporting needs of private firms and their stakeholders (e.g., international financial reporting standards for small and medium-sized enterprises), private firm managers, and private firm suppliers. Adopted methodology Ordinary Least Squares regression analyses. Analyses We examine the association between financial reporting quality and trade credit financing for a large sample of private firms from Europe’s five largest economies, i.e., France, Germany, Italy, Spain, and the United Kingdom. Our sample period spans from 2010 to 2016. We use the Amadeus database as our source of data. We regress trade credit capital on three proxies for financial reporting quality. In cross-sectional analyses, we repeat our main estimations by interacting our proxies for financial reporting quality with proxies for information asymmetry and credit rationing. Findings We find strong evidence that high-quality financial reporting is associated with more trade credit financing in private firms. We further show that the positive relation between high-quality financial reporting and trade credit is stronger when information asymmetry and uncertainty about future cash flows is high as well as when credit is rationed. These findings suggest that suppliers complement insider communication channels and financial reporting quality and provide a more nuanced understanding of the interplay among information asymmetry, credit rationing, and trade credit financing.

We examine the evolutionary path of companies' corporate social responsibility (CSR) since their debuts as public companies. We find that firms' average CSR score is rising over the time they are listed in the public capital market. Neither the CSR score change over the age of the firm nor the general trend of CSR over time can explain this pattern. The phenomenon is more likely driven by the number of years the firms have been in the public market. We further find supporting evidence that this pattern of rising CSR since the public listing is more pronounced when the firm is more profitable, holds more cash, has a higher payout ratio, or has more free cash flows. Overall, our findings support the hypothesis that improving CSR performance may not be the priority of most firms new to the public market, but the "public camera effect" is an effective mechanism to assure the growth of CSR assuming the firms remain in the public market.

In a randomized field experiment, I test if the way in which information is presented influences consumer behavior. Users of an online account aggregation app received a personalized index representing their net worth as a lifetime monthly cash flow. The presentation of the index varied in the framing used to describe the index and in the salience of the comparison between the index and the user's historical spending. Consumers that received a consumption frame (promoting a mental reflection about the affordability of future consumption) and a salient comparison with historical spending decreased their discretionary spending by 15% relative to other treatments throughout the eight months of the experiment. The effect persisted for an additional eight months after the removal of the experiment content from the app. The sensitivity of consumers' spending to information design presents opportunities for policies aimed at influencing saving rates.

Using a large representative sample of bank card transactions, this paper examines the impact of terrorist attacks on the household consumption structure choice between credit versus debit accounts. Compared with the baseline period, we document a daily increase of 0.19% more in the fraction of credit card spending out of total card spending for the attack-hit-city consumers than the non-attack-hit city consumers during the three weeks on and after the terrorist attacks. The incremental credit card usage is stronger for consumers who reside close to the attack location and after the attack events with severe outcomes. Consistent with the strategic choice mechanism, the consumption structure adjustment is immediate while not persistent. The adjustment concentrates among consumers with high liquidity constraints, high revolving credit card debt, unstable cash flows, and when the costs of using credit accounts are anticipated in the further future. The adjustment derives from a shift of debit account spending towards credit account spending, and consumers without credit cards do not significantly change their spending. We also document an increase in investments upon the terrorist attacks, driven by the lower-risk savings-related investments. The increased credit card spending ratio manifests in discretionary goods. Overall, our study highlights the real economic impact of terrorist attacks on household consumption through the strategic choice under economic uncertainty.

In this paper we outline how to value private companies and work through a real case study. The corporate finance and valuation techniques on display can be used to value any private company or project that is illiquid with little or no market data. Together with this paper we provide the full background information for the case study, including consolidated balance sheet, cash flow and income statements and an Excel workbook with a full valuation breakdown . Two valuation approaches are presented. The first approach is called ‘multiples’ and requires we first identify sensible comparable companies with public data and can serve as a reasonable proxy for our underlying firm or project. Known proxy enterprise values are converted into multiples of EBITDA and extrapolated to value the private company or project of interest. Enterprise value can be measured as a multiple of sales, earnings, EBITDA, EBIAT and many income factors. Typically practitioners measure enterprise value as a multiple of EBITDA to exclude sales margin, capital structure, debt and leverage and other idiosyncratic biases. The second valuation method takes a discounted cash flow (DCF) approach. This approach is forward looking; it projects and values the future cash flows of a company. This method lends itself to richer analysis compared to the multiples approach, but relies heavily on assumptions surrounding cash flow projections, growth rates and the weighted average cost of capital (WACC). The WACC acts as a yield or discount factor and is required to value the cash flows of the firm or project (Burgess, 2020). Finally we compare the prices from several different approaches to arrive at a suitable price range. It is important to note that all approaches involve assumptions and approximations of some kind. Therefore practitioners seek to establish a reasonable price range rather than a single price. Transactions however must take place at a single price and law suits are a popular commonplace negation tactic to squeeze for additional value.

In this reference note, intended for easy reference use by finance generalists, we derive the formulae for a) the prices and dual and single durations and convexities for b) growing and nominal instruments, including c) coupon bonds, zero coupon bonds, annuities, and perpetuities, across d) the seven most useful and relevant combinations of coupon, discounting, and other cash flow details (forms)—all in a relatively compact presentation. These forms include 7 variations of: • Continuous or discrete coupons • Payment timing, i.e., payments made at the end of the period (most common) or payments made at the beginning of the period (annuity due) • Growth beginning right away during the first period, or growth only beginning during the second period (the conventional form for most growing perpetuities and annuities) • Continuous or discrete compounding.

We investigate the impact of accrual accounting on contracting and the characteristics of optimal accrual policies in a continuous-time moral hazard framework. An agent who controls unobservable fundamental performance is compensated via a contract written on cash flows, which contain timing errors, and accounting earnings, which correct timing errors at the expense of introducing measurement errors. Deferred incentives and accruals are substitutes in solving the incentive problems created by cash flow timing errors, and accruals dominate deferred incentives as measurement becomes more precise. If cash flows and earnings are sufficiently informative, then accruals are the primary control mechanism late in the agency relationship when the most efficient accrual policy is time-invariant and standardized - it is driven by measurability rather than agency-specific parameters. By contrast, deferred incentives are the primary control mechanism early in the agency relationship, when the most efficient accrual policy changes over time, is non-standardized, and corrects fewer timing errors than the standardized policy. Overall, our model links optimal long-term incentives to accrual accounting policies and generates novel predictions about dynamic contracting and accounting practices.

The initial structure of real estate investment trusts was predicated on real estate as a long hold asset that benefits from ownership in a portfolio context. Using a sample of U.S. publicly traded equity real estate investment trusts (REITs) from 1995 to 2018, we find that REIT performance is positively correlated with the previous-year property holding periods. The results suggest that adopting long-term investing perspectives is profitable for REITs and their shareholders and highlight that the benefits related to portfolio construction and management are complementary with studies related to property location. Our findings are attributed to enhanced operational efficiency, property-level cash flows, and managerial efforts.

We examine the association between customer concentration and capital structure adjustment speed using a sample of listed firms in the U.S from 1977 to 2019. We find that the customer-concentrated firms have a lower speed of leverage adjustment. The decomposition of customer types identifies corporate customers as the driving force. Moreover, customer concentration affects leverage adjustment speed mainly through increased cash flow volatility and asset specificity. The negative association is more pronounced in firms with high relationship-specific investments and low switching costs for their customers. Our findings highlight the vital role of customers as one of the key stakeholders in capital structure decisions.

We predict individual stock returns over horizons from 1 month to 10 years using machine learning. Cumulative stock returns are significantly predictable in the cross-section over all horizons. One-month ahead predicted returns explain only a quarter of the variation in 10-year predicted returns, suggesting that predicted returns at different horizons follow distinct dynamics. Predictors related to turnover and volatility are influential at all horizons. Momentum, cash flow and size related predictors are mostly important at shorter horizons, while dividend yield, value and long-term reversal related predictors are more important at longer horizons.

This paper provides an overview of rules for taxation and dividend distributions for EU and UK listed entities in EU regulated markets. Empirical research on IFRS application typically considers IFRS as informative about future cash flows. However, taxes and distributable dividends are based on national rules different from IFRS in all EU countries prior to Brexit. To analyze these differences, researchers need to know about 1) how taxable and distributable income are determined in different EU countries mandating IFRS for most listed firms; 2) the differences between IFRS and the national rules on taxable and distributable income. Regarding Question 1), we analyze and classify the EU countries’ regulations about tax and income distributions and whether and how the are legally linked to IFRS. To address Question 2), we develop an ordinal measure of the de jure differences between IFRS income and taxable income on the one hand and IFRS income and distributable income on the other. Our study contributes to empirical research on the informativeness of IFRS by providing measures of book-tax and book-dividend conformity within the EU and the UK. By comparing the national rules to IFRS, we enhance the understanding of the relevance of IFRS reporting.

We show that when borrowers are privately informed about their creditworthiness and lenders have a soft budget constraint, efficient investment requires a limit on the fraction of a firm’s cash flows that can be pledged to outsiders. That is, pledgeability should neither be too low nor too high. An increase in pledgeability, or, more broadly, creditor rights, can either promote re-investment in zombie firms, which increases other firms’ cost of capital, or it can lead to inefficient under- investment, depending on the composition of equilibrium credit demand. Thus, greater pledgeability can reduce net social surplus, and even trigger a Pareto loss.

Share repurchases have become persistent. Firms use cash flow as the primary source of capital to finance repeated share repurchases. This internal financing increases (decreases) retained earnings (paid-in-capital) in the capital structure and weakens the sensitivity of investment to cash flow. Our findings suggest that traditional explanations for share repurchases—to distribute temporary cash flows, signal undervaluation, or increase the leverage ratio—have lost power, and that share repurchases have become associated with a firm’s financial maturity as captured by retained earnings-to-assets, with mature firms displaying a long-term increase (decrease) in the sensitivity of share repurchases (investment) to cash flows.