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R ISK transfer and price discovery are two of the major contributions of futures markets to the organization of economic activity (Working (1962), Evans (1978, p. 80), and Silber (1981)). Risk transfer refers to hedgers using futures contracts to shift price risk to others. Price discovery refers to the use of futures prices for pricing cash market transactions (Working (1948), Wiese (1978, p. 87), and Lake (1978, p. 161)). The significance of both contributions depends upon a close relationship between the prices of futures contracts and cash commodities. This paper examines the characteristics of price movements in cash (or spot) markets and futures markets for storable commodities. Section II presents an analytical model of simultaneous price dynamics which suggests that, over short intervals of time, the correlation of price changes is a function of the elasticity of arbitrage between the physical commodity and its counterpart futures contract. Greater elasticity fosters more highly correlated price changes, and thereby facilitates the risk transfer function. The elasticity of supply of arbitrage services is constrained by, among other things, storage and transaction costs. Thus, futures contracts will not, in general, provide perfect risk transfer facilities over short time horizons. The essence of the price discovery function of futures markets hinges on whether new information is reflected first in changed futures prices or in changed cash prices (Hoffman (1932, pp. 258259)). The model in section II provides a framework for analyzing whether one market is dominant in terms of information flows and price discovery. In section III we develop a model based on section II which is appropriate for estimating the lead-lag relationship between cash prices and futures prices. Section IV presents empirical estimates of the parameters of the model for seven different storable commodities: wheat, corn, oats, frozen orange juice concentrates, copper, gold, and silver. The cost of arbitrage between cash and futures differs across these commodities. For this reason we are not surprised to find inter-commodity differences in the correlation of short-run price changes and in the substitutability of futures contracts for cash market positions. With respect to the price discovery function of futures markets, we find that while futures markets dominate cash markets, cash prices do not merely echo futures prices; there are reverse information flows from cash markets to futures markets as well.

ABSTRACT Cash‐rich firms are more likely than other firms to attempt acquisitions. Stock return evidence shows that acquisitions by cash‐rich firms are value decreasing. Cash‐rich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cash‐rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Consistent with the stock return evidence, mergers in which the bidder is cash‐rich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanation for acquisitions by cash‐rich firms.

Building on the Dechow et al. (1998) model of the accrual process, this study investigates the role of accruals in predicting future cash flows. The model shows that each accrual component reflects different information relating to future cash flows; aggregate earnings masks this information. As predicted, disaggregating accruals into major components—change in accounts receivable, change in accounts payable, change in inventory, depreciation, amortization, and other accruals—significantly enhances predictive ability. Each accrual component, including depreciation and amortization, is significant with the predicted sign in predicting future cash flows, incremental to current cash flow. The cash flow and accrual components of current earnings have substantially more predictive ability for future cash flows than several lags of aggregate earnings. The inferences are robust to alternative specifications, including controlling for operating cash cycle and industry membership.

ABSTRACT The average cash‐to‐assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.

ABSTRACT We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms’ long‐term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.

The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification ” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidation-motivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.

ABSTRACT We examine the cross‐sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi‐quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.

A model of earnings, cash flows and accruals is developed assuming a random walk sales process, variable and fixed costs, and that the only accruals are accounts receivable and payable, and inventory. The model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating cash cycle. Also, the model is used to predict serial and cross-correlations of each firm's series. The implications and predictions are tested on a 1337 firm sample over 1963–1992. Both earnings and cash flow forecast implications and correlation predictions are generally consistent with the data.

ABSTRACT We investigate the association between financial constraints and cash savings generated through tax planning. We predict that an increase in financial constraints leads firms to increase internally generated funds via tax planning. We measure financial constraints based on changes in firm-specific and macroeconomic measures. We find that firms facing increases in financial constraints exhibit increases in cash tax planning. Our results indicate that among profitable firms, firm-years with the largest increases in firm-specific constraints are associated with declines in firms' cash effective tax rates ranging from 3.00 to 5.14 percent, which equate to between 2.87 and 4.82 percent of operating cash flows. We also find that (1) the impact of financial constraints on tax planning is greatest among firms with low cash reserves, and (2) constrained firms achieve a substantial portion of their current tax savings via deferral-based tax planning strategies, despite the lack of a financial statement benefit. JEL Classifications: E69; H25; H60. Data Availability: Data used in this study are available from public sources identified in the paper.

We examine the social pension in South Africa, where large cash sums-about twice the median per capita income of African households-are paid to people qualified by age but irrespective of previous contributions. We present the history of the scheme and use a 1993 nationally representative survey to investigate the redistributive consequences of the transfers, documenting who receive the pensions, their levels of living, and those of their families. We also look at behavioural effects, particularly the effects of the cash receipts on the allocation of income to food, schooling, transfers, and savings. In South Africa, a large 'social pension'-about twice the median per capita income of African households-is paid in cash to people qualified by age irrespective of previous contributions. We present the history of the scheme and explain how such large transfers could come about in an economy in which the recipients were not only politically weak, but without any political representation whatsoever. We then use a 1993 nationally representative survey to investigate the redistributive consequences of the transfers, documenting who receive the pensions, their levels of living, and those of their families. We also look at behavioural effects, particularly the effects of the cash receipts on the allocation of income to food, schooling, transfers, and savings. The pressing policy issue for South Africans is whether it makes sense to target seven billion rand (nearly $2 billion) of social expenditure through the current pension schemes. Our analysis contributes to the discussion by documenting the redistributive and behavioural effects of the transfers. We find that, at least as far as immediate incidence is concerned, and without allowance for behavioural effects, the social pension is an effective tool of redistribution, and that the households it reaches are predominantly poor. Because so many of the elderly among South Africa's African population live with children, the social pension is also effective in putting money into house

Abstract Investigates whether stock prices reflect information about future corporate earnings contained in accrual and cash flow components of currents earnings. Relationship of current earnings performance on the magnitude of cash and accrual flows; Relationship between the accrual and cash flow of earnings.

Previous studies report that cash holdings are more valuable for financially constrained firms than for unconstrained firms. We examine (i) why this is so and (ii) why some constrained firms appear to hold too little cash. Our results indicate that greater cash holdings are associated with higher levels of investment for constrained firms with high hedging needs and that the association between investment and value is stronger for constrained firms than for unconstrained firms. These findings imply that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. We further find that some constrained firms exhibit low cash holdings because of persistently low cash flows. Overall, our findings support the view that greater cash holdings of constrained firms are a value-increasing response to costly external financing.

ABSTRACT This study develops a firm life cycle proxy using cash flow patterns. The patterns provide a parsimonious indicator of life cycle stage that is free from distributional assumptions (i.e., uniformity). The proxy identifies differential behavior in the persistence and convergence patterns of profitability. For example, return on net operating assets (RNOA) does not mean-revert (spread of 7 percent after five years between mature and decline firms) when examined by life cycle stage, which has implications for growth rates and forecast horizons. Further, determinants of future profitability such as asset turnover and profit margin are differentially successful in generating increases in profitability conditional on life cycle stage. Finally, investors do not fully incorporate the information contained in cash flow patterns and, as a result, undervalue mature firms. The cash flow proxy is a robust tool that has applications in analysis, forecasting, valuation, and as a control variable for future research. Data Availability: All data are available from public sources identified in the paper.

No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.

ABSTRACT Agency theories predict that the value of corporate cash holdings is less in countries with poor investor protection because of the greater ability of controlling shareholders to extract private benefits from cash holdings in such countries. Using various specifications of the valuation regressions of Fama and French (1998) , we find that the relation between cash holdings and firm value is much weaker in countries with poor investor protection than in other countries. In further support of the importance of agency theories, the relation between dividends and firm value is weaker in countries with stronger investor protection.

ABSTRACT We investigate the source of stockholder gains in going private transactions. We find support for the hypothesis advanced by Jensen that a major source of these gains is the mitigation of agency problems associated with free cash flow. Using a sample of 263 going private transactions from 1980 through 1987, our results indicate a significant relationship between undistributed cash flow and a firm's decision to go private. In addition, we find that premiums paid to stockholders are significantly related to undistributed cash flow. These results are especially strong for firms that went private between 1984 and 1987 and also for firms whose managers owned relatively little equity before the going private transaction.

This article uses managerial control rights data for over 5000 firms from 31 countries to examine the net costs and benefits of cash holdings. We find that when external country-level shareholder protection is weak, firm values are lower when controlling managers hold more cash. Further, when external shareholder protection is weak we find that firm values are higher when controlling managers pay dividends. Only when external shareholder protection is strong do we find that cash held by controlling managers is unrelated to firm value, consistent with generally prevailing U.S. and international evidence.

Several developing economies have recently introduced conditional cash transfer programs, which provide money to poor families contingent on certain behavior, usually investments in human capital, such as sending children to school or bringing them to health centers. The approach is both an alternative to more traditional social assistance programs and a demand-side complement to the supply of health and education services. Unlike most development initiatives, conditional cash transfer programs have been subject to rigorous evaluations of their effectiveness using experimental or quasi-experimental methods. Evaluation results for programs launched in Colombia, Honduras, Jamaica, Mexico, Nicaragua, and Turkey reveal successes in addressing many of the failures in delivering social assistance, such as weak poverty targeting, disincentive effects, and limited welfare impacts. There is clear evidence of success from the first generation of programs in Colombia, Mexico, and Nicaragua in increasing enrollment rates, improving preventive health care, and raising household consumption. Many questions remain unanswered, however, including the potential of conditional cash transfer programs to function well under different conditions, to address a broader range of challenges among poor and vulnerable populations, and to prevent the intergenerational transmission of poverty. Copyright 2005, Oxford University Press.

ABSTRACT This article compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book‐to‐market ratios.