Cash Flow (cash + flow)

Distribution by Scientific Domains
Distribution within Business, Economics, Finance and Accounting

Kinds of Cash Flow

  • free cash flow

  • Terms modified by Cash Flow

  • cash flow model

  • Selected Abstracts

    The Effect of Venture Capital Financing on the Sensitivity to Cash Flow of Firm's Investments

    Fabio Bertoni
    G32; D92; G23 Abstract This work studies the effect of venture capital (VC) financing on firms' investments in a longitudinal sample of 379 Italian unlisted new-technology-based firms (NTBFs) observed over the 10-year period from 1994 to 2003. We distinguish the effects of VC financing according to the type of investor: independent VC (IVC) funds and corporate VC (CVC) investors. Previous studies argue that NTBFs are the firms most likely to be financially constrained. The technology-intensive nature of their activity and their lack of a track record increase adverse selection and moral hazard problems. Moreover, most of their assets are firm-specific or intangible and hence cannot be pledged as collateral. In accordance with this view, we show that the investment rate of NTBFs is strongly positively correlated with their current cash flows. We also find that after receiving VC financing, NTBFs increase their investment rate independently of the type of VC investor. However, the investments of CVC-backed firms remain sensitive to shocks in cash flows, whereas IVC-backed firms exhibit a low and statistically not significant investment,cash flow sensitivity that we interpret as a signal of the removal of financial constraints. [source]

    Signaling, Free Cash Flow and "Nonmonotonic" Dividends

    FINANCIAL REVIEW, Issue 1 2010
    Kathleen Fuller
    G35 Abstract Many argue that dividends signal future earnings or dispose of excess cash. Empirical support is inconclusive, potentially because no model combines both rationales. This paper does. Higher quality firms pay dividends to eliminate the free cash-flow problem, while firms that outsiders perceive as lower quality pay dividends to signal future earnings and reduce the free cash-flow problem. In equilibrium, dividends are nonmonotonic with respect to the signal observed by outsiders; the highest quality firms pay smaller dividends than lower perceived quality firms. The model reconciles the existing literature and generates new empirical predictions that are tested and supported. [source]

    Cash disbursements: How to minimize cash output

    Rob Reider
    There is an art to effectively managing cash disbursements. The author shows how to use a variety of techniques to help you minimize cash output,and not get in trouble doing it. After you read this article, your motto will be "No Pay Before Its Time." This article is excerpted and adapted from Managing Cash Flow: An Operational Focus by Rob Reider, published by John Wiley & Sons, Inc. © 2008 Wiley Periodicals, Inc. [source]

    A Market, Operation, and Mission Assessment of Large Rural For-Profit Hospitals With Positive Cash Flow

    Michael J. McCue DBA
    ABSTRACT:,Context: National benchmark data for 2002 indicate that large rural for-profit hospitals have a median cash flow margin of 19.5% compared to 9.2% for their nonprofit counterparts. Purpose: This study aims to gain insight regarding the driving factors behind the high cash flow performance of large rural for-profit hospitals. Methods: Using 3 annual periods of Centers for Medicare and Medicaid cost report data with the last fiscal year ending between September 30, 2002, and August 30, 2003, the study found a cash flow margin of 21.5% for the large rural for-profit hospitals. All these facilities were owned by hospital management companies. To assess their underlying market, operational, and mission factors, these hospitals were compared to a similar comparison group of large rural nonprofit hospitals that are system owned and have positive cash flows. Findings: Using logistic regression analysis, the study found lower operating expense per adjusted discharge and salary expense as a percentage of total operating expense among large rural for-profit, system-owned hospitals with positive cash flows relative to nonprofits with similar traits. Conclusion: Overall, the findings of this study reflect how these for-profit hospitals, which are owned by hospital management companies, focus on controlling their labor costs as well as operating costs per discharge in order to achieve a greater positive cash flow position. [source]

    The Asset Pricing Palette: Cash Flows, Returns and Trading Behavior

    FINANCIAL REVIEW, Issue 4 2001
    Andrea J. Heuson
    G12 Abstract Asset pricing is the topic of the 2001 Eastern Finance Association Symposium and the five papers selected for this collection, which are summarized below, span a broad range of subjects that fall under the umbrella of the determinants of market prices. For example, the Schwartz and Moon article that introduces the symposium uses real options methodology to value firms whose cash flows are subject to multiple sources of uncertainty while the Luders and Peisl and Mixon analytical models that close the selections incorporate dual stochastic processes to derive relationships between information flow, trading volume and price volatility that are consistent with empirical evidence. In between, Mishra and O'Brien present new evidence on the important of index and factor selection when estimating the required return on equity and Spahr and Schwebach revisit the issue of time diversification by reintroducing a statistical construct from earlier times. Each of the works included here makes an important contribution to our understanding of the asset pricing process in a distinct area and opens new doors onto avenues for future research. [source]

    The Effect of Earnings Permanence, Growth, and Firm Size on the Usefulness of Cash Flows and Earnings in Explaining Security Returns: Empirical Evidence for the UK

    Andreas Charitou
    This paper examines the relative information content of earnings and cash flows for security returns using a methodology incorporating contextual factors which may affect earnings and cash flow response coefficients. For our UK dataset, we provide evidence that the earnings coefficient is related to earnings permanence, growth and firm size and that the cash flow coefficient may be related to growth. Although our results emphasise the value relevance of earnings, they also suggest that both contemporaneous and prior period cash flow are positively related to security returns and that market-to-book and market value of equity have predictive power for returns. [source]

    Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach

    THE JOURNAL OF FINANCE, Issue 5 2007
    ABSTRACT How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different brands face very different exchange rate risks. [source]

    Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis

    Chuan-San Wang
    We examine the market reaction to announcements of actual share repurchases, events that cluster both within and across firms. Using a multivariate regression model, we find that the market reacts positively to the events, indicating that these announcements provide additional information to that contained in the initial repurchase intention announcements. Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q, and is not related to signaling costs as measured by the size of the repurchase. Our findings generally support the hypothesis that share repurchases reduce the agency costs of excessive free cash flow. [source]

    Does Hedging Affect Firm Value?

    Evidence from the US Airline Industry
    Does hedging add value to the firm, and if so, is the source of the added value consistent with hedging theory? We investigate jet fuel hedging behavior of firms in the US airline industry during 1992,2003 to examine whether such hedging is a source of value for these companies. We illustrate that the investment and financing climate in the airline industry conforms well to the theoretical framework of Froot, Scharfstein, and Stein (1993). In general, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. Our results show that jet fuel hedging is positively related to airline firm value. The coefficients on the hedging variables in our regression analysis suggest that the "hedging premium" is greater than the 5% documented in Allayannis and Weston (2001), and might be as large as 10%. We find that the positive relation between hedging and value increases in capital investment, and that most of the hedging premium is attributable to the interaction of hedging with investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs. [source]

    Dividend Initiations and Asymmetric Information: A Hazard Model

    FINANCIAL REVIEW, Issue 3 2003
    Sanjay Deshmukh
    G35 Abstract This paper investigates the dynamics of dividend policy using a hazard model. Specifically, the paper examines dividend initiations for a sample of firms that went public between 1990 and 1997. These dividend initiations are examined in the context of an alternative explanation based on the pecking order theory. The results indicate that the probability or the hazard rate of a dividend initiation is negatively related to both the level of asymmetric information and growth opportunities and positively related to the level of cash flow. These results are consistent with a pecking order explanation but inconsistent with a signaling explanation. [source]

    Agency problems and audit fees: further tests of the free cash flow hypothesis

    ACCOUNTING & FINANCE, Issue 2 2010
    Paul A. Griffin
    G34; G35; M41; M42 Abstract This study finds that the agency problems of companies with high free cash flow (FCF) and low growth opportunities induce auditors of companies in the US to raise audit fees to compensate for the additional effort. We also find that high FCF companies with high growth prospects have higher audit fees. In both cases, higher debt levels moderate the increased fees, consistent with the role of debt as a monitoring mechanism. Other mechanisms to mitigate the agency costs of FCF such as dividend payout and share repurchase (not studied earlier) do not moderate the higher audit fees. [source]

    Private equity bids in Australia: an exploratory study

    ACCOUNTING & FINANCE, Issue 1 2010
    Larelle Chapple
    G34 Abstract In this study, we provide an insight into how private equity players choose their targets and the bid arrangements they prefer. We test our expectations of the unique features of private equity targets using a sample of 23 listed private equity target firms during 2001,2007. We find, relative to a benchmark sample of 81 corporate targets matched by year and industry, the private equity target firms to be larger, more profitable, use their assets more efficiently, more highly levered and have greater cash flow. Multivariate testing indicates that private equity targets have relatively greater financial slack, greater financial stability, greater free cash flow and lower measurable growth prospects. All conclusions are found to be robust to a control sample of 502 takeover bids during 2001,2007. [source]

    Influence of the heat recovery steam generator design parameters on the thermoeconomic performances of combined cycle gas turbine power plants

    Manuel Valdés
    Abstract This paper proposes a methodology to identify the most relevant design parameters that impact on the thermal efficiency and the economic results of combined cycle gas turbine power plants. The analysis focuses on the heat recovery steam generator (HRSG) design and more specifically on those operating parameters that have a direct influence on the economic results of the power plant. These results are obtained both at full and part load conditions using a dedicated code capable of simulating a wide number of different plant configurations. Two different thermoeconomic models aimed to select the best design point are proposed and compared: the first one analyzes the generating cost of the energy while the second one analyzes the annual cash flow of the plant. Their objective is to determine whether an increase in the investment in order to improve the thermal efficiency is worth from an economic point of view. Both models and the different HRSG configurations analysed are compared in the results section. Some parametric analysis show how the design parameters might be varied in order to improve the power plant efficiency or the economic results. Copyright © 2004 John Wiley & Sons, Ltd. [source]

    Corporate Governance in India

    Rajesh Chakrabarti
    The Indian corporate governance system has both supported and held back India's ascent to the top ranks of the world's economies. While on paper the country's legal system provides some of the best investor protection in the world, enforcement is a major problem, with overburdened courts and significant corruption. Ownership remains concentrated and family business groups continue to be the dominant business model, with significant pyramiding and evidence of tunneling activity that transfers cash flow and value from minority to controlling shareholders. But for all its shortcomings, Indian corporate governance has taken major steps toward becoming a system capable of inspiring confidence among institutional and, increasingly, foreign investors. The Securities and Exchanges Board of India (SEBI), which was established as part of the comprehensive economic reforms launched in 1991, has made considerable progress in becoming a rigorous regulatory regime that helps ensure transparency and fair practice. And the National Stock Exchange of India, also established as part of the reforms, now functions with enough efficiency and transparency to be generating the third-largest number of trades in the world, just behind the NASDAQ and NYSE. Among more recent changes, the enactment of Sarbanes,Oxley type measures in 2004,which includes protections for minority shareholders in family- or "promoter"-led businesses,has contributed to recent increases in institutional and foreign stock ownership. And while family- and government-controlled business groups continue to be the rule, India has also seen the rise of successful companies like Infosys that are free of the influence of a dominant family or group and have made the individual shareholder their central governance focus. [source]

    Corporate Cash Policy and How to Manage it with Stock Repurchases

    Amy Dittmar
    At the end of 2004 total U.S. corporate cash holdings reached an all-time high of just under $2 trillion,an amount equal to roughly 15% of the total U.S. GDP. And during the past 25 years, average cash holdings have jumped from 10% to 23% of total corporate assets. But at the same time their levels of cash have risen, U.S. companies have paid out dramatically increasing amounts of cash to buy back shares. This article addresses the following questions: What accounts for the dramatic increase in the average level of corporate cash holdings since 1980? And why do some companies keep so much cash (with one fourth of U.S. firms holding cash amounting to at least 36% of total assets) while others have so little (with another quarter having less than 3%)? Why do companies pay out excess cash in the form of stock repurchases (rather than, say, dividends), and what explains the significant increase in repurchases (both in absolute terms and relative to dividends) over time? The author begins by arguing that cash reserves provide companies with a buffer against possible shortfalls in operating profits,one that, especially during periods of financial trouble, can be used to avoid financial distress or provide funding for promising projects that might otherwise have to be put off. Such buffers are particularly valuable in the case of smaller, riskier companies with lots of growth opportunities and limited access to capital markets. And the dramatic increase in corporate cash holdings between 1980 and the present can be attributed mainly to an increase in the risk of publicly traded companies,an increase in risk that reflects in part a general increase in competition, but also a notable change over time in the kinds of companies (smaller, newer, less profitable, non-dividend paying firms) that have chosen to go public. At the other end of the corporate spectrum are large, relatively mature companies with limited growth opportunities. Although such companies tend to produce considerable free cash flow, they also tend to retain relatively small amounts of cash (as a percentage of total assets), in part because of shareholder concern about the corporate "free cash flow problem",the well-documented tendency of such companies to destroy value through overpriced (often diversifying) acquisitions and other misguided attempts to pursue growth at the expense of profitability. For companies with highly predictable earnings and investment plans, dividends provide one means of addressing the free cash flow problem. But for companies with more variable earnings and less predictable reinvestment, open-market stock repurchases provide a more flexible means of distributing cash to shareholders. Unlike the corporate "commitment" implied by dividend payments, an open market stock repurchase program creates what amounts to an option but not an obligation to distribute funds. The value of such flexibility, which increases during periods of increased risk and uncertainty, explains much of the apparent substitution of repurchases for dividends in recent years. [source]


    Brian J. Hall
    The past two decades have seen a dramatic increase in the equitybased pay of U.S. corporate executives, an increase that has been driven almost entirely by the explosion of stock option grants. When properly designed, equity-based pay can raise corporate productivity and shareholder value by helping companies attract, motivate, and retain talented managers. But there are good reasons to question whether the current forms of U.S. equity pay are optimal. In many cases, substantial stock and option payoffs to top executives,particularly those who cashed out much of their holdings near the top of the market,appear to have come at the expense of their shareholders, generating considerable skepticism about not just executive pay practices, but the overall quality of U.S. corporate governance. At the same time, many companies that have experienced sharp stock price declines are now struggling with the problem of retaining employees holding lots of deep-underwater options. This article discusses the design of equity-based pay plans that aim to motivate sustainable, or long-run, value creation. As a first step, the author recommends the use of longer vesting periods and other requirements on executive stock and option holdings, both to limit managers' ability to "time" the market and to reduce their incentives to take shortsighted actions that increase near-term earnings at the expense of longer-term cash flow. Besides requiring "more permanent" holdings, the author also proposes a change in how stock options are issued. In place of popular "fixed value" plans that adjust the number of options awarded each year to reflect changes in the share price (and that effectively reward management for poor performance by granting more options when the price falls, and fewer when it rises), the author recommends the use of "fixed number" plans that avoid this unintended distortion of incentives. As the author also notes, there is considerable confusion about the real economic cost of options relative to stock. Part of the confusion stems, of course, from current GAAP accounting, which allows companies to report the issuance of at-the-money options as costless and so creates a bias against stock and other forms of compensation. But, coming on top of the "opportunity cost" of executive stock options to the company's shareholders, there is another, potentially significant cost of options (and, to a lesser extent, stock) that arises from the propensity of executives and employees to place a lower value on company stock and options than well-diversified outside investors. The author's conclusion is that grants of (slow-vesting) stock are likely to have at least three significant advantages over employee stock options: ,they are more highly valued by executives and employees (per dollar of cost to shareholders); ,they continue to provide reasonably strong ownership incentives and retention power, regardless of whether the stock price rises or falls, because they don't go underwater; and ,the value of such grants is much more transparent to stockholders, employees, and the press. [source]


    Armen Hovakimian
    Most academic insights about corporate capital structure decisions come from models that focus on the trade-off between the tax benefits and financial distress costs of debt financing. But empirical tests of corporate capital structure indicate that actual debt ratios are considerably different from those predicted by the models, casting doubt on whether most companies have leverage targets at all. In particular, there is considerable evidence that corporate leverage ratios reflect in large part the tendency of profitable companies to use their excess cash flow to pay down debt, while unprofitable companies build up higher leverage ratios. Such behavior is consistent with a competing theory of capital structure known as the "pecking order" model, in which management's main objectives are to preserve financing flexibility and avoid issuing equity. The results of the authors' recent study suggest that although past profits are an important predictor of observed debt ratios at any given time, companies nevertheless often make financing and stock repurchase decisions designed to offset the effects of past profitability and move their debt ratios toward their target capital structures. This evidence provides support for a compromise theory called the dynamic tradeoff model, which says that although companies often deviate from their leverage targets, over the longer run they take measures to close the gap between their actual and targeted leverage ratios. [source]


    Dwight R. Lee
    In a widely cited 1986 article in the American Economic Review, Michael Jensen gave the concept of free cash flow (FCF) a new twist by redefining it as cash flow in excess of that required to fund all projects with positive net present values. Put another way, FCF represents funds available in the firm that managers may choose to hold as idle cash, return to shareholders, or invest in projects with returns below the firm's cost of capital. In redefining FCF in this way, Jensen converted FCF from a measure of economic income and value into a measure of corporate assets available for discretionary, and potentially value-destroying, use by firm managers. And, as he argued in his important article, managers in mature businesses with substantial free cash flow have a tendency to destroy value by plowing too much capital back into those businesses or, often worse, making ill-advised acquisitions in unrelated businesses. Several methods have been developed in financial markets and internal corporate governance systems to discourage managers from wasting FCF. Better monitoring by boards of directors, large ownership blocks, and properly aligned management compensation contracts are all parts of the solution. And the extraordinary increase in stock repurchases in recent years, invariably applauded by investors, is another illustration of the market's success in encouraging companies to address their free cash flow problems. But if the "FCF problem" of the private sector has attracted considerable attention from finance scholars, the problem is even more acute in the public sector, where FCF can be thought of as tax revenue in excess of what is required to finance well-defined and generally accepted levels of public services. Unlike the private sector, in the public sector there are neither measures nor mechanisms by which to monitor and constrain wasteful spending by elected officials. In this article, the authors attempt to measure the costs to taxpayers of government FCF using the case of Alaska, which since 1969 has received a huge windfall of tax revenue from North Slope oil leases. After examining the state's public finances from 1968 through 1993, the authors offer $25 billion as a conservative estimate of the social losses from Alaska's waste of free cash flow during that 25-year period. [source]

    Value of Multinationality: Internalization, Managerial Self-interest, and Managerial Compensation

    Kenneth K. Yung
    In this paper, we examine the impact of managerial self-interest on the value of multinationality. Since agency theory also suggests that a divergence between the interests of managers and shareholders can be aligned by effective managerial incentive, we also examine the effect of managerial compensation on the value of multinationality. Our results show that for high- Q (Tobin's Q > 1) firms, investors do not associate the spending of free cash flow on multinationality with the problem of overinvestments. For high- Q firms, it is also found that the value of multinationality can be enhanced by effective managerial incentives. For low- Q firms (Tobin's Q < 1), it is found that the concern of managerial self-interest overwhelms the benefits of internalization, making multinationality a value-decreasing event. For low- Q firms, managerial compensation is also ineffective in promoting value-enhancing foreign direct investments. [source]

    The Effect of Earnings Permanence, Growth, and Firm Size on the Usefulness of Cash Flows and Earnings in Explaining Security Returns: Empirical Evidence for the UK

    Andreas Charitou
    This paper examines the relative information content of earnings and cash flows for security returns using a methodology incorporating contextual factors which may affect earnings and cash flow response coefficients. For our UK dataset, we provide evidence that the earnings coefficient is related to earnings permanence, growth and firm size and that the cash flow coefficient may be related to growth. Although our results emphasise the value relevance of earnings, they also suggest that both contemporaneous and prior period cash flow are positively related to security returns and that market-to-book and market value of equity have predictive power for returns. [source]

    Using accounts payable to improve cash flow

    Mary S. Schaeffer
    Accounts payable definitely has a cash flow/cash management component, the author reminds us. And there are several tactics accounts payable can use to improve your company's cash flow. What are they, and how can you use them effectively? © 2007 Wiley Periodicals, Inc. [source]

    Capital budgeting: Problems and new approaches

    James S. Sagner
    Capital budgeting techniques using discounted cash flow calculate the present value of future flows, compared to the cash outflows or the investment required to fund a capital project. But companies are reluctant to commit funds to capital projects these days,probably because of disappointing past returns. The author explains current capital budgeting practices and reviews new approaches that may offer some solutions. He also offers a handy quick checklist for capital budgeting decisions. © 2007 Wiley Periodicals, Inc. [source]

    Analyzing sales for better cash flow management

    Rob Reider
    Do you sometimes get the feeling that your sales function is in business for itself,instead of supporting the company? That means big problems for managing cash flow, warn the authors of this article. What steps must you take to make sales an integral part of cash flow planning? The authors provide a detailed how-to guide for you to use. © 2003 Wiley Periodicals, Inc. [source]

    Managerial Compensation and Capital Structure

    Elazar Berkovitch
    We investigate the interaction between financial structure and managerial compensation and show that risky debt affects both the probability of managerial replacement and the manager's wage if he is retained by the firm. Our model yields a rich set of predictions, including the following: (i) The market values of equity and debt decrease if the manager is replaced; moreover, the expected cash flow affirms that retain their managers exceeds that affirms that replace their managers, (ii) Managers affirms with risky debt outstanding are promised lower severance payments (golden parachutes) than managers affirms that do not have risky debt. (Hi) Controlling for firm's size, the leverage, managerial compensation, and cash flow of firms that retain their managers are positively correlated, (iv) Controlling for the firm's size, the probability of managerial turnover and firm value are negatively correlated, (v) Managerial pay-performance sensitivity is positively correlated with leverage, expected compensation, and expected cash flows. [source]

    Genetic quality of domesticated African tilapia populations

    R. E. Brummett
    Anecdotal and empirical evidence exists for substantial (up to 40%) declines in growth among Oreochromis populations domesticated in both large and small-scale fish farms in Africa. These declines are at least partly attributable to poor genetic management, including inadvertent selection, inbreeding, bottle-necks and founder effects. Due to restricted cash flow and investment capital, genetic management and selective breeding for the improvement of domesticate populations are difficult for small-scale farmers, but feasible on larger-scale farms. In managing domesticated gene pools, feral populations can serve as a broodstock reservoir, making the use of indigenous species advantageous. A development model of large-scale hatcheries producing selected lines of sex-reversed, indigenous tilapia for sale to smaller-scale farmers is proposed as a solution to the problems of poor genetic management in African aquaculture. [source]

    Dynamic inventory management with cash flow constraints

    Xiuli Chao
    Abstract In this article, we consider a classic dynamic inventory control problem of a self-financing retailer who periodically replenishes its stock from a supplier and sells it to the market. The replenishment decisions of the retailer are constrained by cash flow, which is updated periodically following purchasing and sales in each period. Excess demand in each period is lost when insufficient inventory is in stock. The retailer's objective is to maximize its expected terminal wealth at the end of the planning horizon. We characterize the optimal inventory control policy and present a simple algorithm for computing the optimal policies for each period. Conditions are identified under which the optimal control policies are identical across periods. We also present comparative statics results on the optimal control policy. © 2008 Wiley Periodicals, Inc. Naval Research Logistics 2008 [source]

    Corporate Governance and Performance: The REIT Effect

    Rob Bauer
    Real estate investment trusts (REITs) offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces agency problems. We exploit a unique and leading corporate governance database to test whether corporate governance matters for the performance of U.S. REITs. We document for a sample including governance ratings of more than 220 REITs that firm value is significantly related to firm-level governance for REITs with low payout ratios only. Repeating the analysis with the complete database that includes more than 5,000 companies and a control sample of firms with high corporate real estate ratios, we find a strong and significantly positive relation between our governance index and several performance variables, indicating that the partial lack of a relation between governance and performance in the real estate sector might be explained by a REIT effect. [source]

    Determinants of Multifamily Mortgage Default

    Wayne R. Archer
    Option,based models of mortgage default posit that the central measure of default risk is the loan,to,value (LTV) ratio. We argue, however, that an unrecognized problem with extending the basic option model to existing multifamily and commercial mortgages is that key variables in the option model are endogenous to the loan origination and property sale process. This endogeneity implies, among other things, that no empirical relationship may be observed between default and LTV. Since lenders may require lower LTVs in order to mitigate risk, mortgages with low and moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk endogeneity and its empirical implications, we examine the default experience of 495 fixed,rate multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) during the period 1991,1996. The extensive nature of the data supports multivariate analysis of default incidence in a number of respects not possible in previous studies. Consistent with our expectations, we find that LTV evidences no relationship to default incidence, while the strongest predictors of default are property characteristics, including three,digit ZIP code location and initial cash flow as reflected in the debt coverage ratio. The latter results are particularly interesting in that they dominated the influence of postorigination changes in the local economy. [source]

    Cash Flow, Consumption Risk, and the Cross-section of Stock Returns

    THE JOURNAL OF FINANCE, Issue 2 2009
    ZHI DA
    ABSTRACT I link an asset's risk premium to two characteristics of its underlying cash flow: covariance and duration. Using empirically novel estimates of both cash flow characteristics based exclusively on accounting earnings and aggregate consumption data, I examine their dynamic interaction in a two-factor cash flow model and find that they are able to explain up to 82% of the cross-sectional variation in the average returns on size, book-to-market, and long-term reversal-sorted portfolios for the period 1964 to 2002. This finding highlights the importance of fundamental cash flow characteristics in determining the risk exposure of an asset. [source]

    Why Do Firms Become Widely Held?

    THE JOURNAL OF FINANCE, Issue 3 2007
    An Analysis of the Dynamics of Corporate Ownership
    ABSTRACT We examine the evolution of insider ownership of IPO firms from 1970 to 2001 to understand how U.S. firms become widely held. A majority of these firms has insider ownership below 20% after 10 years. Stock market performance and liquidity play an extremely important role in ownership dynamics. Firms with stocks that are highly valued, are liquid, and have performed well experience large decreases in insider ownership and become widely held. Ownership also falls for low cash flow and high capital expenditures firms. Surprisingly, variables proxying for agency costs have limited success in explaining the evolution of insider ownership. [source]