Transaction Frequency and Hedging in Commodity Processing

ABSTRACTWe show theoretically that variable production costs reduce systematic risk of firms' cash flows if capital and variable inputs are complementary in firms' production and input prices are procyclical. In our dynamic model, this operating hedge effect is weaker for more profitable firms, giving rise to a gross profitability premium. Moreover, gross profitability and value factors are distinct and negatively correlated, and their premia are not captured by the capital asset pricing model (CAPM). We estimate the model by simulated method of moments, and find that its main implications for stock returns and cash flow dynamics are quantitatively consistent with the data.

Valuation Beyond CAPM: How to Calculate With Earnings Risk and Insolvency

This paper focuses on multi-period cash flow risk which is measured by the SD in dual-channel supply chain. The manufacturer offers a consignment contract to the retailer, exposing cash flow risk due to the payment delay. We analyze cash inflows, outflows, and netflows of each member in dual-channel supply chain. We also examine different influencing factors on the preference of cash flows in dual-channel supply chain and then provide some managerial implications to deal with cash flow risk.

This research aims to present an empirical investigation of the relative and incremental predictive ability of alternative accrual- and cash-based accounting measures to forecast future cash flows in an Australian context. To achieve this goal, eight ordinary least squares (OLS) regression models on pooled time-series of cross-sectional data are developed. To evaluate the forecasting performance of the models, both within-sample and out-of-sample forecasting tests are employed. A number of contextual factors, including the length of the operating cash cycle, industry membership, firm profitability and firm size, were taken into account in the main OLS regression analysis of this study to examine whether the predictive ability of accrual- and cash-based data to forecast future cash flows were influenced by these factors. In addition, a more sophisticated approach used for estimating regression models, namely fixed-effects, is undertaken to control for unobseved differences across firms. Results from various regression model analyses suggest that cash flow from operations is more important than earnings in predicting future cash flows. Disaggregating earnings into cash flow from operations and accruals enhances the forecast of future cash flows, compared with aggregate earnings. The accrual component of earnings provides incremental information content for future cash flows beyond that provided by the cash flow component of earnings. Various decompositions of total accruals (i.e., current and non-current accruals, accrual components, and discretionary and nondiscretionary accruals) have incremental information content beyond that contained in total accruals. Disaggregating cash flow from operations into operating cash receipts and payments, as reported under the direct method of cash flow presentation, improves the predictive ability of aggregate cash flow from operations. Indirect cash flow information incrementally enhances the ability of direct cash flow components in forecasting future cash flows. This study also provides evidence that the model based on both accrual and cash flow components outperforms other existing cash flow prediction models. Various categorisations of the sample confirm that the findings are not conditional on the selected control factors. However, the results reveal new knowledge on the characteristics of accrual- and cash-based accounting data relating to future cash flows. For instance, this study documents that cash flow and its components (earnings and accruals) are more (less) informative to market participants in the forecast of a firm’s future cash flows when: (i) the firm is small; (ii) their operating cash cycle is short; and (iii) the firm makes a loss. Furthermore, the level of the predictive ability of both accrual- and cash-based accounting variables varies across industries.

Option-for-Guarantee Swap and Equity-for-Guarantee Swap with Idiosyncratic Risk

Back to Fundamentals: The Accrual–Cash Flow Correlation, the Inverted-U Pattern, and Stock Returns

Currently, the Ukrainian insurance market demonstrates the emergence of problems in certain sectors and a reduction in the growth rate of insurance premiums. Losses of insurance companies also increase, which in turn leads to lower profitability of own funds and increases costs. All these are the reasons for the decrease in profitability of the insurance business. In order to maintain the status of insurance companies in the market, one should pay attention to the cash flow. In the process of operations it is important to optimize the cash flow and change the financial management methods of the insurance company accordingly. The financial stability of an insurance organization depends on the effectiveness of cash flow management, and due to the imbalance of funds, additional liabilities may arise that lead to the instability of the insurer's finances. The purpose of this study is to develop directions for optimizing cash flows, the implementation of which will improve the financial stability of the insurance company. The research shows the problems of financial stability of insurance companies. Having analyzed the scientific studies and publications, the general definition of financial stability was found. It is shown through the effective management of cash flow, especially through the optimization of output cash flow of insurance companies. The peculiarities of cash flows generated by insurance companies are determined, and the importance of cash flows for financial stability is shown. The article justifies the choise of propositions that can improve cash flows based on analysis of financial activity of NSSC “Oranta”. Investigation of the financial activity of NSSC “Oranta” shows that there are problems with the company's finances that are associated with the increased commercial expenses and receivable accounts. The algorithm of cash flow optimization was developed and its influence on financial stability through the increasing of profitability was explained. Having solved this problem, the insurance company can improve its capital structure, increase the profitability of the capital and its financial activity that will make company's finances more stable. Key words cash flow, cash flow balance, cash flow liquidity, insurance companies, financial stability.

This study aims to see the extent to which risk management practices in companies, especially banking, influence the sustainability of conventional banking financial performance on the Indonesia Stock Exchange. The research sample is the banking industry on the IDX capital market during the period 2017 to 2019. Of the 41 banks that went public, 38 conventional banks were used as research samples. The dependent variable used is the Sustainable growth rate as a proxy for sustainable financing performance The independent variables used are Cash flow operating to total liability as a proxy for risk management practice in cash flow operating, cash flow investing to total liability, cash flow financing to total liability and cash flow operating to shareholder equity. The results show that risk management practices in cash flow finance to total libility, risk management practices in cash flow investing to total liability, risk management practices in cash flow operating to total share holder equity have an impact on the sustainability of banking financial performance. These results have implications for banking management, especially in terms of predicting the sustainability of banking financial performance. Key Words: sustainable financing performance, cash flow risk management pratices

The decomposition of consumption beta into a component driven by assets’ cash-flow news and one related to assets’ discount-rate news reveals that macroeconomic risks embodied in cash flows largely account for the cross-sectional dynamics of average stock returns. Empirically, we find that differences in expected excess returns between low book-to-market and high book-to-market portfolios are associated with differences in their cash-flow betas, and thus reflect macroeconomic, especially consumption-related risks. This result holds true for a broad set of consumption-based asset pricing models. In addition, the results indicate that the risk premium on equity markets is primarily driven by the exposure of assets’ cash-flow components to the cyclical variability of durable consumption goods.

David Mercier Abstract High royalty rates, along with low oil price, can make an operation uneconomic creating a lose-lose situation for the royalty owner and producer. For the operator, a high royalty rate has the same effect as higher operating costs. Both the royalty owner and operator have a tremendous incentive to be innovative when negotiating profit distribution splits. Unfortunately neither the royalty owner nor the operator can consistently predict changes in oil price, all we can do is seek the flexibility to survive oil price fluctuations. However, a royalty schedule that tracks oil price, when properly engineered, decreases the likelihood of negative cash flow during a low oil price swing. Introduction Traditionally, many royalty owners have tried to get the highest fixed royalty rate possible thinking a higher rate naturally translates into a higher royalty payment. This approach has resulted in royalties that need to be renegotiated when the oil price goes lower to prevent premature abandonment. Historical crude oil price forecast have been extremely unreliable - Ref 1. Negotiating the highest possible royalty rate the producer will accept should never be the royalty owner's strategy. In any profit sharing agreement the (royalty owner / operator) economic interdependence is large; i.e., a win-lose relationship ultimately ends up lose-lose. Royalty owners' focus should be on maximizing royalty revenue. High royalty rates do not necessarily equate to maximized royalty revenue. Net Profits sharing contracts are progressive systems employed in many places around the world (Ref 2), however, typically, net profit contracts require the royalty (mineral) owner to be constantly evaluating the details of the operation. This continuous auditing, of the operation, is costly for both the mineral owner and operator. One of the worst experiences a working interest owner can have is to see the operator's president driving an expensive car while wondering if the car was paid for out of his net profit's share; that is, because of an accounting error. It has been my experience, when net profits decrease or go negative the (working interest owner / field operator) relationship tends to deteriorate. Not many operators want to have the mineral owner constantly going over their accounting books. Also, net profit contracts, as compared with royalty contracts, expose the mineral owner to increased financial liability - the risk of negative cash flow. Increased financial risk is not bad when it comes with a proportionate amount of increased benefit. Since overseeing a royalty rate schedule requires less administrative overhead than a net profits split, switching from a net profits split to a royalty schedule can potentially increase field value. This paper will present different techniques used to obtain maximum field value while reducing risk. A price sensitive sliding scale lessens risk by reducing operator cash flow variation while lowering the likelihood of field abandonment. Experienced oil investors know that they cannot control oil price swings; however, with this royalty rate that slides with oil price they can control the risk that, in turn, drives the returns. It is common in the United States for owners of oil properties to charge those who recover and sell these resources a royalty expressed as a fraction of the property's gross production. Royalty agreements most commonly observed specify a constant royalty. Two criteria that need to be satisfied when determining a royalty are:equity (Is the royalty rate fair?)Efficiency (Does the royalty rate interfere unduly with the economics of the oil field?). With a fixed royalty rate, the royalty owners total revenue equals the product of royalty rate, oil price, and the total production. Higher royalty rates can lower production, often causing properties to be abandon prematurely. To the producer, increased royalty rates are similar to increased operating costs. P. 159^

The study examined cash flow ratios as predictors of business failure of healthcare firms in Nigeria. The objectives of the study were to ascertain the effect of operating cash flow ratio, cash flow to debt ratio, and price to cash flow ratio on Altman’s zeta score of healthcare firms in Nigeria. The study adopted ex-post-facto research design, covering a period of 10 years (from 2013 to 2022). Secondary data used for the study were extracted from annual reports and accounts of selected healthcare firms listed on the Nigeria Exchange Group (NGX) from 2013 to 2022. Multiple regression technique was used to test the hypotheses. The result of the test of hypotheses revealed that the operating cash flow ratio has a statistically non-significant negative effect on the Altman z-score of healthcare firms in Nigeria (p-value = 0.3397). The finding also indicates that the cash flow to debt ratio has a statistically non-significant negative effect on the Altman z-score of healthcare firms in Nigeria (p-value = 0.2937). Lastly, the finding reveals that the price to cash flow ratio has a non-significant positive effect on the Altman z-score of healthcare firms in Nigeria (p-value = 0.5281). The policy implications of these findings suggest that when assessing the financial health and bankruptcy risk of healthcare firms in Nigeria, policymakers and regulators should consider factors beyond cash flow ratios. It was recommended therefore that healthcare firms in Nigeria should diversify their sources of cash flow beyond operating cash flow to improve financial stability and mitigate bankruptcy risk. Healthcare firms should have a careful evaluation of debt management practices is necessary to maintain a healthy balance between cash flow generation and debt obligations in healthcare firms. Market sentiment reflected in the price to cash flow ratio should not be relied upon as the sole indicator of financial stability. Healthcare firms should prioritize fundamental financial and operational indicators to assess their financial health and mitigate bankruptcy risk.

We study hedging cash-flow risks in a supply chain where firms invest internal funds to improve production efficiencies. We offer a decomposition framework to capture the cost-reduction and flexibility effect of hedging. It allows us to understand how a firm’s hedging choice depends on its supply chain partner’s decision, and how such interaction is affected by supply chain characteristics such as market size, cash-flow volatility, and correlation. When firms’ cash flows are independent of each other, they are more likely to hedge with a larger market size. When cash flows are correlated, the impact of market size and volatility on firms’ hedging decisions presents multiple patterns, contingent on whether their risks amplify or offset each other. This paper was accepted by Gustavo Manso, finance.

The farm level economic impacts of the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill) on representative crop and livestock operations are projected in this report. The analysis was conducted over the 2002-2009 planning horizon using FLIPSIM, AFPC’s whole farm simulation model. Data to simulate farming and ranching operations in the nation’s major production regions came from two sources: - Producer panel cooperation to develop economic information to describe and simulate representative crop, livestock, and dairy farms. - Projected prices, policy variables, and input inflation rates from the Food and Agricultural Policy Research Institute (FAPRI) December 2004 Baseline. The primary objective of the analysis is to determine the farms’ economic viability by region and commodity through the life of the 2002 Farm Bill. The FLIPSIM policy simulation model incorporates the historical risk faced by farmers and ranchers for prices and production. This report presents the results of the December 2004 Baseline in a risk context using selected simulated probabilities and ranges for annual net cash farm income values. The probability of a farm experiencing annual cash flow deficits and the probability of a farm losing real net worth are included as indicators of the cash flow and equity risks facing farms through the year 2009. This report is organized into ten sections. The first section summarizes the process used to develop the representative farms and the key assumptions utilized for the farm level analysis. The second section summarizes the FAPRI December 2004 Baseline and the policy and price assumptions used for the representative farm analyses. The third through sixth sections present the results of the simulation analyses for feed grain, wheat, cotton, and rice farms. The seventh through ninth sections summarize simulation results for dairy, cattle and hog farms. Two appendices constitute the final section of the report. Appendix A provides tables to summarize the physical and financial characteristics for each of the representative farms. Appendix B provides the names of producers, land grant faculty, and industry leaders who cooperated in the panel interview process to develop the representative farms.

The present study tries to determine the vulnerability of changes in Public sector banks of India during recent time. Banks undoubtedly contribute towards the economic development of the country through capital formation, generating employment opportunity, providing financial assistance to industries and many more related activities. Series of reformatory measures have been taken up in late nineties’ in the Public sector Banks and some banks have been identified as weak by Verma Committee and restructuring policy have been adopted to make sustainable in the new Liberalized regime. The concept of strategic grouping has become very important for the Banks to identify its position in respect of competition faced by the other banks. Strategic grouping also enable poor performing banks to switchover to the better performing groups. The present study puts an effort to analyse the reason behind such changes in public banks with focus to the recent merger. The present study finds some striking result in terms of strategic grouping and susceptibility to change in the Public banking sector of India with special mention to some newly merged banks like Bank of Baroda, Vijaya Bank and Dena Bank. This study focusses on cash flow risk by relying on the liquidity aspect of the selected Public Sector Banks.KeywordsPublic sector banksDiscriminant analysisCash flow riskStrategic grouping

This research tests the efficiency of the debt policy, dividend policy and ownership structure as mechanism of resolution of agency conflicts between shareholders and managers due to the problem of overinvestment, in the limitation of the problem of the free cash flow. By estimating three stage least square simultaneous model and on the basis of a sample of 35 non-financial Tunisian listed companies selected for the period 2000–2009, our results are in favor of the theory of free cash flows of Jensen (1986) that stipulates that the debt policy represents the principal governance mechanism that can limit the risk of free cash flow. However, our empirical results do not confirm our hypothesis implies that the solution to reduce the level of free cash flow in the Tunisian firms with low growth opportunities is the use of policy dividends. It therefore appears that in the case of our sample, managers must settle their debts to creditors. They should thus allocate free cash flow to profitable projects. Thus, the debt reduces agency costs of free cash flow and present as a control mechanism which substitute dividend policy. Also, it is found that managerial ownership lowers the level of agency costs of free cash flow. However, the ownership concentration increases the risk of the free cash flow. Finally, regarding the impact of ownership structure on the payout ratio, our results support the idea that more risk aversion of the majority shareholders and their intention to expropriate minority shareholders through the extraction private benefits are the cause of a low dividend.