The Determinant Factors of Earnings Persistence

The purpose of this research is to provide empirical evidence about the effect of operating cash flow, sales volatility, cash flow volatility, operating cycle, and book tax difference on earnings persistence. The company used in this research is manufacturing company listed in Indonesia Stock Exchange (IDX) from 2016 until 2020. Samples of this research were selected based on the purposive sampling method and resulted in 43 companies, therefore the data used for this research amounting to 215 data. The data obtained from these samples were analyzed using multiple regression method. The result of this research show that operating cycle have influence on earnings persistence. While operating cash flow, sales volatility, cash flow volatility, and book tax difference have no influence on earnings persistence.

A matter of others' money: How cash holdings of other firms affect a firm’s cash holding?

PurposeThis study examines the effects of comparable companies, within the same industry, on cash-holding (CH) levels of a specific firm in the Stock Exchange of Thailand (SET). Peer effects are hypothesized to affect a firm's average CH levels.Design/methodology/approachThe authors use data of listed firms in the Thai stock markets from 1995 to 2018. The sample consists of 5,277 firm-year observations. The authors perform robustness tests by incorporating gross domestic product, economy and competitiveness.FindingsPeer firms' CH levels correspond positively to the specific firm's CH. This strengthens further for firms with high cash flow volatility during periods of high competition. Unfavorable economic periods also motivate the association between a firm's CH and peer firms' CH.Practical implicationsA policy on CH should account for cash held by peer firms. Firms can justify their CH policy as compatible with peers' cash flows, especially during periods of competitiveness and an unfavorable economy.Originality/valueThe authors provide novel evidence on how emerging markets' CH levels differ from those in developed markets and propose adjusted explanations for the rivalry- and information-based theories. The findings add substantial knowledge to corporate finance by arguing that CH policies are based on peer firms' strategic moves.

Three Essays on Capital Structure

<p>This thesis consists of three self-contained essays about the relationship between cash flow and investment volatility and firm capital structure and cash holdings. Capital structure measures sources of financing that allow a firm to operate, invest, and grow. The first essay reviews the theoretical relationship between firm capital structure and cash flow volatility, develops testable hypotheses, constructs a data set, and then tests the hypotheses using several measures of firm cash flow volatility and econometric methods that account for the non-linear relationship of proportional variables. Overall, the evidence indicates that ceteris paribus, a one standard deviation increase from the mean of cash flow volatility, implies approximately by 24% decrease in the long-term debt ratio, a 26% decrease in probability of holding debt with over 10 years to maturity, and a 39% increase in the probability of not holding either short or long term debt. These findings are novel in the empirical capital structure literature and show the importance of cash flow volatility in firm financial policies. The second essay studies the financing behaviour of Hospital Corporation of America (HCA) from 1990 to 2013 and demonstrates variation in HCA’s market and book leverage ratios due to 1) mergers and acquisitions and divestitures that change the firm’s total assets, 2) share buybacks, and 3) leveraged buyouts and public offerings that change the firm’s ownership. The paper scrutinizes variation in HCA’s market and book leverage ratios independently as well as relative to each other. Our evidence shows that i) HCA’s management team used HCA’s excess cash from divestitures to repurchase HCA’s stock rather than pay off HCA’s debt, ii) HCA’s market leverage ratio tends to stay in a target leverage zone, and iii) in some years HCA’s management team used the book leverage ratio as a tool to keep the market leverage ratio inside a target leverage zone. In the third essay, we investigate the influence of investment volatility on capital structure and cash holdings using a broad definition of investment. Despite theoretical motivation, the relationship between investment volatility and capital structure has not been studied in the empirical literature. All in all, our evidence suggests that i) firms with relatively high capital expenditure and acquisition investment volatility hold relatively higher levels of debt and lower levels of cash, ii) firms fund large capital expenditures and/or acquisition by increasing debt or decreasing cash, and iii) immediately after funding large investment firms reduce debt levels and increase cash holdings. Research and development investment volatility is related to lower debt levels and higher cash levels, and does not exhibit similar investment spike funding. Overall, our results are consistent with parts, but not all, of the DeAngelo, DeAngelo and Whited (2011) model.</p>

Three Essays on Capital Structure

<p>This thesis consists of three self-contained essays about the relationship between cash flow and investment volatility and firm capital structure and cash holdings. Capital structure measures sources of financing that allow a firm to operate, invest, and grow. The first essay reviews the theoretical relationship between firm capital structure and cash flow volatility, develops testable hypotheses, constructs a data set, and then tests the hypotheses using several measures of firm cash flow volatility and econometric methods that account for the non-linear relationship of proportional variables. Overall, the evidence indicates that ceteris paribus, a one standard deviation increase from the mean of cash flow volatility, implies approximately by 24% decrease in the long-term debt ratio, a 26% decrease in probability of holding debt with over 10 years to maturity, and a 39% increase in the probability of not holding either short or long term debt. These findings are novel in the empirical capital structure literature and show the importance of cash flow volatility in firm financial policies. The second essay studies the financing behaviour of Hospital Corporation of America (HCA) from 1990 to 2013 and demonstrates variation in HCA’s market and book leverage ratios due to 1) mergers and acquisitions and divestitures that change the firm’s total assets, 2) share buybacks, and 3) leveraged buyouts and public offerings that change the firm’s ownership. The paper scrutinizes variation in HCA’s market and book leverage ratios independently as well as relative to each other. Our evidence shows that i) HCA’s management team used HCA’s excess cash from divestitures to repurchase HCA’s stock rather than pay off HCA’s debt, ii) HCA’s market leverage ratio tends to stay in a target leverage zone, and iii) in some years HCA’s management team used the book leverage ratio as a tool to keep the market leverage ratio inside a target leverage zone. In the third essay, we investigate the influence of investment volatility on capital structure and cash holdings using a broad definition of investment. Despite theoretical motivation, the relationship between investment volatility and capital structure has not been studied in the empirical literature. All in all, our evidence suggests that i) firms with relatively high capital expenditure and acquisition investment volatility hold relatively higher levels of debt and lower levels of cash, ii) firms fund large capital expenditures and/or acquisition by increasing debt or decreasing cash, and iii) immediately after funding large investment firms reduce debt levels and increase cash holdings. Research and development investment volatility is related to lower debt levels and higher cash levels, and does not exhibit similar investment spike funding. Overall, our results are consistent with parts, but not all, of the DeAngelo, DeAngelo and Whited (2011) model.</p>

Pengaruh Tata Kelola Perusahaan dan Volatilitas Arus Kas terhadap Persistensi Laba

The study aims to test empirically the effect of corporate governance: independent board of commissioners, audit committee, managerial ownership and cash flow volatility on earnings persistence. This study uses a quantitative approach with a causal associative research type. The population used in this study are manufacturing companies listed on the Indonesia Stock Exchange in 2015-2019. By using purposive sampling method, 83 samples were selected. Earnings persistence is measured using measurements in research by Lipe (1990) and Sloan (1996). Independent board of commissioners, audit committee and managerial ownership are measured using measurements in research by Khafid (2012). And cash flow volatility is measured using measurements in research by Fanani (2010). The result show that the independent board of commissioners, audit committee and managerial ownership have no significant effect on earnings persistence and cash flow volatility has no significant effect on earning persistence. For further research, it is hped that this object can be reproduced and the research year because in this study it only examines manufacturing companies for the 2015-2019 observation year. In addition, further research can look for othe independent variabels if later doing the same research. The reaserch conducted is expexted to add independent variabels so that the results will be better.

Pengaruh Volatilitas Arus Kas, Volatilitas Penjualan, Tingkat Hutang dan Ukuran Perusahaan Terhadap Persistensi Laba pada Perusahaan Pertambangan Batu Bara yang Terdaftar di Bursa Efek Indonesia (BEI) Periode 2014-2018

“Earning persistence is a component of earning quality. This study aims to determine whether the cash flow volatility, sales volatility, debt levels and company size affect the persistence of earnings. Sampling method is purposive sampling. The population in this study consisted of 24 coal mining companies listed in the Indonesia Stock Exchange and the observation period starts from 2014-2018. The number of samples that meet the sample criteria is 10 coal companies with 50 observational data. Data analysis method used is multiple linear regression. Based on the results af analysis and testing, it is found that cash flow volatility has a significant effect on earnings persistence. While sales volatility has a negative and significant effect on earnings persistence, the level of debt has a positive and significant effect on earnings persistence, and firm size has on effect on earnings persistence.

Do Country-level Creditor Protections Affect Firm-level Debt Structure Concentration?

We study the effects of country-level creditor protections on the firm-level choice of debt structure concentration. Using data from 46 countries, we show that firms form more concentrated debt structures in countries with stronger creditor protection. We propose a trade-off framework of optimal debt structure and show that in strong creditor rights regimes, the benefit of forming concentrated structures outweighs its cost. Because strong creditor protections increase liquidation bias, firms choose concentrated debt structures to improve the probability of successful distressed debt renegotiations. Firms with ex-ante higher bankruptcy costs, including those with higher intangibility, cash flow volatility, R&D expenses, and leverage exhibit stronger effects. Firms with restricted access to capital are also affected more. A difference-in-differences analysis of firms’ debt structure responses to creditor rights reforms confirms the cross-country results. Our findings are robust to alternative settings and a battery of robustness checks.

The Effect Of Accrual Reliability, Debt Level And Cash Flow Volatility On Earnings Persistence

This research is entitled “The Effect of Accrual Reliability, Debt Level and Cash Flow Volatility on Earnings Persistence”. The research question is “Is the persistence of earnings is affected by accrual reliability, debt levels and cash flow volatility? The research objective is to examine empirically the effect of accrual reliability, debt levels and cash flow volatility on the earnings persistence. Accrual reliability, level of debt and cash flow volatility are independent variables in this study while earnings persistence is the dependent variable. This study used secondary data in the form of annual financial statements of sample companies, namely basic industry and chemicals sector companies listed on the Indonesia Stock Exchange for the period 2014-2018. The sample selection method used was purposive sampling method. In total, there were two 12 sample companies in this study. This study used multiple linear regression data analysis technique including classical assumption test, F-statistical test and hypothesis testing. The results showed the accrual reliability and cash flow volatility had no effect on earnings persistence, while the level of debt had a positive effect on earnings persistence, and therefore, the second hypothesis is acceptable.