The Importance of Capital Investment and Debt Financing in Deriving Shareholders’ Value; A Literature Survey

Shareholders’ value is the most important goal and an integral part of the companies’ strategic decision-making process. When a corporate performs well and creates value for its shareholders, it benefits the whole economy. The past studies concluded that efficient decision making in the areas of capital investments and debt financing can ensure high financial performance and shareholders’ value creation. This paper thoroughly reviews the literature on impact of capital investment and debt financing decisions on shareholders’ value. Capital investment is a very important managerial decision because it increases company's economic profit. However, past studies have found that not every time the capital investment results in increasing the value as it may vary with the level of investment. Moreover, debt financing lowers the free cash flows due to the payment of fixed interest payments, thus lowering shareholders' return and value. Therefore, this paper recommends the need of further research to better understand the effect of capital investment and debt financing decisions on shareholders’ value.

DETERMINATION OF DIVIDEND POLICY OF MANUFACTURING COMPANIES IN INDONESIA

This study examines the factors that determine (determination) dividend policy in manufacturing companies in Indonesia. In general, economic conditions in Indonesia are still in the emerging market category. As a developing country, Indonesia's capital market is relatively large and has its own characteristics which are reflected in investor behavior and government regulations in the capital market. Indonesia, in its behavior in the capital market adheres to a civil law system, meaning that investors are given the widest freedom to conduct transactions in the capital market, especially in the wrong amount owned by investors. The variables used to analyze dividend policy are profitability, free cash flows, firm size and leverage. This study only focuses on manufacturing companies that distribute dividends with an observation period from 2015-2019. The sampling method used purposive sampling and obtained 145 companies that distribute dividends. The data was processed using panel data regression analysis with analysis tools using E-Views software. From the research, it is found that the ROA and F_SIZE variables have a positive and significant effect on the DPR. FCF and Leverage variables measured by (TDTE) have a negative and significant effect on dividend policy as measured by the DPR in manufacturing companies in Indonesia.

Relationship Between Free Cash Flows and Corporate Governance Levels in the Light of Agency Theory

This research analyzes the relationship between free cash flows (FCFs) and the different levels of Corporate Governance present in the Brazilian stock market. To this end, the sample was composed of 212 Brazilian publicly traded companies listed on Brasil, Bolsa, Balcão [B]³, in the period from 2010 to 2018. The methodology consisted of estimating a regression for panel data, using the random effects model, estimating by generalized least square (GLS) and assuming adjustments for autocorrelation and robust standard errors for heteroscedasticity. The results found, for the sample studied, suggest that Corporate Governance levels are positively related to the FCFs. In synergy, when compared to the Traditional level of [B]³, companies listed on the Novo Mercado and Level 2 levels tend to present higher FCF values. In addition, the larger the size of the companies and the higher their return on equity, the higher their FCFs tend to be, just as companies in stages of maturity tend to present lower FCF values. The relevance of this research is based on analyzing, in a stock market subject to imperfections, factors that may affect decisions about the level of cash maintenance of companies, more specifically by evaluating how Corporate Governance mechanisms relate to the theory of FCFs, in a context of potential conflict of interest.

Impact of Elimination of Dividend Distribution Tax on Indian Corporate Firms amid COVID Disruptions

Economic fallouts from COVID-19 have been unprecedented across all industries, with a handful of exceptions. The present study attempts to capture the impact of dividend distribution tax elimination, introduced through the Indian Finance Act 2020, on corporate dividend behavior in India. It explores the determinants of dividend payouts, changing payout decisions, dividend behavior of regular payers, and the prevalence of factors associated with changing payouts. Out of the top 1000 firms, based on their market capitalization at the Bombay Stock Exchange, 509 non-financial firms pursuing consistent dividend payments from 2015 to 2019 are analyzed. The study also examines the dividend behavior of regular payers exhibiting a stable or step-up payout from 2015 to 2019. COVID’s impact on the firm’s financial performance and sentiments seems to dominate, suppressing investors’ expectations of enhanced payouts associated with dividend distribution tax advantages, with considerable reductions in payouts and omissions shown by regular and irregular payers in 2020 and 2021 vis-à-vis the preceding years. The findings signify that the dividend payouts of sample firms are positively associated with the firms’ size, MBV ratio, and past dividends, and negatively allied with free cash flows and the EBITDA margin. Regular payers are observed to be more sensitive to past dividends. The study lends credence to the conservatism and prevalence of signaling and catering theories in the dividend behavior of Indian corporate firms.

Egg production: conventional or cage-free?

Research methodology This case was primarily researched using academic research papers, industry reports (Egg Industry Center and others), and finance databases including Standard and Poor’s Capital IQ. Regarding the cost and investment budgets, the case relies mainly on an experiment conducted by the Coalition for Sustainable Egg Supply, updated by the authors of this case. Case overview/synopsis Eggs produced by cage-free birds, while more expensive than conventionally produced eggs, are gaining in popularity among consumers who want only eggs that are produced more humanely. A number of major distributors, including Whole Foods, McDonalds and Starbucks have pledged to sell only cage-free produced eggs by 2025. Several states including California, Oregon and Michigan have passed laws limiting conventional egg production. The case provides costs and industry information and needed to project free cash flows and risk-adjusted opportunity cost of capital and perform break-even capital budgeting analysis of the two egg production alternatives. Complexity academic level This case is appropriate for graduate corporate finance courses. It is particularly appropriate for agribusiness finance courses. A preliminary exercise was used during the fall 2018 in a land grant university, just after the “Prevention of Cruelty to Farm Animals Act,” also known as Proposition 12, was passed in California in favor of cage-free egg production. The exercise was revised and used in the fall 2019 in the same class. This extended version of the case, was classroom tested in the fall 2020 in an agribusiness finance graduate class, with agricultural economics and business students enrolled.

Board diversity and firm risk-taking in the tourism sector: Moderating effects of board independence, CEO duality, and free cash flows

This study examines the effect of board diversity on risk-taking for tourism firms and analyzes the moderating effect of board independence, CEO duality, and free cash flows in this proposed relationship. Using a composite index of board diversity and a sample of tourism firms from the US hotel, restaurant, and airline industries, we find that greater board diversity leads to lower risk-taking, measured in standard deviation of return on assets. Moreover, we report that the risk-reduction effect of board diversity is more profound when tourism firms have less board independence and less free cash flows for investments. When board diversity is decomposed into relation-oriented and task-oriented diversity attributes, we find that only the task-oriented diversity is influential in reducing firm risk-taking for tourism firms. Akin to main analysis, the board independence and free cash flows are significant moderators of the relationship between task-oriented diversity and firm risk-taking.

Managers’ Investment Decisions: Incentives and Economic Consequences Arising from Leases

What incentives do managers face that might give rise to inefficient investments in leases? If managers make inefficient investments in leases, what economic consequences arise for those managers and their firms? We develop a model of expected investments in leased assets and use the residuals from the model as proxies for inefficient investments. We find that, in contrast to investments in capital expenditures, leasing appears to be a mechanism through which managers can seemingly over-invest, even among firms with high quality financial reporting and negative free cash flows. Examining economic consequences, we predict and find that unexpected investments in leased assets trigger increasing future sales growth but declining future earnings growth for as long as three years ahead. We also find a negative relation with contemporaneous stock returns, suggesting investors view unexpected investments in leases as value destructive. Finally, despite negative returns consequences, we find that unexpected investments in leases are associated with higher CEO compensation driven primarily by future sales growth. Our study suggests that compensation contracts that reward growth may give managers’ incentives to drive sales growth with larger-than-expected investments in leased assets, which lead to slower future earnings growth and negative share price consequences for investors. Our results should inform managers and board members, investors, and researchers interested in investment efficiency, corporate governance, and leases.

Strategi Manajemen Mengoptimalkan Kinerja dengan Konsep Beyond Budgeting

There are two important elements that create an environment of high freedom for managers and employees, namely the company management culture and the availability of a clear information system as the basis for the management process. The new model of leadership is based on the principle of empowering managers and employees, as well as an adaptable management process. This new leadership principle must be able to unlock all potential managers and employees in running the organization so that they can react appropriately and quickly when facing new opportunities and market risks. To be successful, members of the beyond budgeting project must include control specialists, human resource management, change management, and computer experts. Not all companies are able to provide all the required resources. In traditional budgeting systems, targets are set based on financial figures and are negotiated centrally. In beyond budgeting, targets are based on high key performance indicators, such as the ratio of return on capital, free cash flows or cost to income. Performance appraisals are no longer carried out for the long term (annually), but are carried out in a shorter period of time on a regular basis and are rolling and decentralized. Beyond Budgeting is the idea of abolishing traditional budgeting processes to eventually improve management control over an organization. By abandoning traditional budgeting processes, a company aims to establish a highly decentralized organizational system and adaptive set of management processes.

Fluxos de caixa livres e endividamento em operadoras de planos de saúde

Este estudo visou analisar o efeito dos fluxos de caixa livres (free cash flows – FCF) sobre o endividamento das operadoras de planos de saúde (OPS) brasileiras entre os anos de 2010 e 2018. Para isso, foram analisados dados públicos econômico-financeiros dessas operadoras, coletados junto à Agência Nacional de Saúde Suplementar (ANS). A pesquisa pode ser classificada como descritiva e quantitativa e a análise dos dados foi realizada por meio da análise de regressão com dados em painel. Os resultados do estudo evidenciam que as variáveis risco de falência, fluxo de caixa, crescimento, lucratividade e rentabilidade são determinantes nas estruturas de capital das organizações. Por outro lado, a variável escudos fiscais não provenientes de dívidas não foi significante nos modelos estimados. A hipótese de pesquisa de que quanto maior o endividamento das OPS menor é o nível de FCF foi confirmada. Os resultados denotam que o nível desses fluxos de caixa da organização afeta negativamente o seu endividamento, minimizando, assim, os conflitos de agência. A principal limitação desta pesquisa, considera-se a falta de dados que não permitiu uma conclusão com todos os modelos propostos. Ressalta-se ainda a amostra limitada e não probabilística, o que impossibilita a generalização dos resultados. Entretanto, apesar das limitações, os achados da pesquisa contribuem para a compreensão do caráter disciplinador das dívidas nas organizações pesquisadas e, salienta-se a relevância do estudo sobre a teoria dos fluxos de caixa livres, considerando a escassez de pesquisas sobre o tema no mercado brasileiro. Palavras-chave: Endividamento. Fluxos de caixa livre (FCF). Operadoras de planos de saúde (OPS). Free cash flows and indebtedness in health plan operators Abstract This study aimed to analyze the effect of free cash flows (FCF) on the indebtedness of Brazilian health plan operators, between the years 2010 and 2018. In this sense, it was analyzed the public economic-financial data of these operators which were collected from the National Supplementary Health Agency. The research can be classified as descriptive and quantitative and the data analysis was fulfilled through regression analysis with panel data. The results of the study show that the variables bankruptcy risk, cash flow, growth, profitability and profitability are determinant in the capital structures of organizations. On the other hand, the variable tax shields not originated from debt was not significant in the estimated models. The research hypothesis that the higher the health plan operators’ indebtedness, the lower the FCF level was confirmed. The results show that the level of these cash flows of the organization affects negatively its indebtedness, minimizing agency conflicts. The main limitation of this research is the lack of data that did not allow a conclusion with all the proposed models. The limited and non-probabilistic sample is also noteworthy, which makes it impossible to generalize the results. However, despite the limitations, the research findings contribute to the understanding of the disciplinary nature of debts in the organizations surveyed, and the relevance of the study on the theory of free cash flows is highlighted, considering the scarcity of research on the topic considering the Brazilian market. Keywords: Indebtedness. Free cash flows (FCF). Health plan operators (OPS).

The Effect of Investment, Free Cash Flow, Earnings Management, and Interest Coverage Ratio on Financial Distress

The purpose of this research is to test investments, free cash flow, earnings management, and interest coverage ratio are affecting the risk of financial distress in healthy enterprises.. Healthy companies can be seen from how large the value of working capital, retained earnings, income before tax, market value and sales implemented in the measurement of the financial difficulties model with the Altman Z-score method. Collection of data by purposive sampling and number of samples as many as 33 companies in the category of healthy companies. The results show that free cash flows and interest coverage ratio significant effect on the financial difficulties of healthy companies whereas investment and earnings management had no significant effect on the financial difficulties of healthy companies