Accounting, Cash Flow and Value Relevance [1st ed.] 9783030506872, 9783030506889

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SPRINGER BRIEFS IN ACCOUNTING

Francesco Paolone

Accounting, Cash Flow and Value Relevance

123

SpringerBriefs in Accounting Series Editors Peter Schuster, Fakultät Wirtschaftswissenschaften, Hochschule Schmalkalden, Schmalkalden, Thüringen, Germany Robert Luther, Department of Accounting, University of the West of England, Bristol, UK

More information about this series at http://www.springer.com/series/11900

Francesco Paolone

Accounting, Cash Flow and Value Relevance

Francesco Paolone Mercatorum University LUISS University Rome, Italy

ISSN 2196-7873 ISSN 2196-7881 (electronic) SpringerBriefs in Accounting ISBN 978-3-030-50687-2 ISBN 978-3-030-50688-9 (eBook) https://doi.org/10.1007/978-3-030-50688-9 © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To Francesca

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4

2

The Cash Flow Statement Under IAS/IFRS . . . . . . . . . . . . . . . . . . . 2.1 A Brief History of Cash Flow Reporting Under IAS 7 . . . . . . . . . 2.2 The General Content of Cash Flow Statement Under IAS 1 . . . . . . 2.3 The Content of IAS 7: Cash Flow Statement . . . . . . . . . . . . . . . . . 2.4 The Definition of Cash and Cash Equivalents . . . . . . . . . . . . . . . . 2.5 The Preparation of Cash Flow Statement . . . . . . . . . . . . . . . . . . . 2.6 Specific Issues of Cash Flow Classification . . . . . . . . . . . . . . . . . 2.6.1 Cash Flows in Foreign Currency . . . . . . . . . . . . . . . . . . . . 2.6.2 Interest and Dividends Collected/Distributed . . . . . . . . . . . 2.6.3 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6.4 Cash Flows from the Purchase/Sale of Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6.5 Cash Flows from Acquisition and Disposal of Subsidiaries and/or Other Business Branches . . . . . . . . . 2.6.6 Cash Flows Relating to Public Contributions . . . . . . . . . . . 2.7 The “Disclosure Initiative” of IAS 7 . . . . . . . . . . . . . . . . . . . . . . 2.8 The Offsetting of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 5 6 7 7 9 14 14 15 16

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The Historical Background of Cash Flow Statement: First Evidences and Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The First Companies to Present a Report on Cash Flow . . . . . . . 3.2 The First Works by Greene (1897) and Cole (1908) . . . . . . . . . . 3.3 The Contribution of Finney . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 The Next Phase of Finney’s Work . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . .

16 17 17 17 19 21 21 23 23 24 25 26 34

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Contents

The Value Relevance of Accounting Information and Cash Flows: A Review of Prior Studies and Models . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Concept of Value Relevance . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Value Relevance, the Efficiency of the Market and the Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Main Models to Assess the Value Relevance . . . . . . . . . . . . . 4.3.1 The Price Models: The Ohlson Model (1989) . . . . . . . . . . 4.3.2 The Return Models: The Model of Easton and Harris (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The Value Relevance in the Literature of Accounting . . . . . . . . . . 4.5 Theoretical Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 The Valuation Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.2 The Theory of Value Relevance . . . . . . . . . . . . . . . . . . . . 4.5.3 The Clean Surplus Theory . . . . . . . . . . . . . . . . . . . . . . . . 4.5.4 The Decision Usefulness Paradigm . . . . . . . . . . . . . . . . . . 4.6 How Cash Flows Explain the Value Relevance . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43 45 46 46 47 47 48 48 50

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Data Analysis on EU and US Listed Companies . . . . . . . . . . . . . . . . 5.1 Hypothesis Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Sampling Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 First Analysis of the EU Context . . . . . . . . . . . . . . . . . . . 5.2.2 Second Analysis of the US Context . . . . . . . . . . . . . . . . . 5.3 Variables and Model Specification . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Descriptive Statistics on EU Context . . . . . . . . . . . . . . . . . 5.4.2 Descriptive Statistics on US Context . . . . . . . . . . . . . . . . . 5.4.3 Regression Results on EU Context . . . . . . . . . . . . . . . . . . 5.4.4 Regression Results on US Context . . . . . . . . . . . . . . . . . . 5.4.5 Robustness Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Conclusion and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53 53 55 55 56 56 58 58 59 60 62 64 64 66

6

Concluding Remarks: The Importance of Cash Flow Statement . . . 6.1 The Relevance of the Cash Flow Statement . . . . . . . . . . . . . . . . 6.2 The Lack of Information Capacity in the Financial Statements and Accruals in the Interpretation of Financial Reporting . . . . . . 6.3 The Cash Flow as a Tool to Overcome Some Limits . . . . . . . . . . 6.3.1 A Tool to Improve “Disclosure” . . . . . . . . . . . . . . . . . . . 6.3.2 A Tool to Overcome the Limits of “Static” Representation of Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 A More Suitable Tool for Measuring Insolvency . . . . . . . 6.3.4 A More Accurate Tool for Business Evaluation . . . . . . . .

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69 69

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70 71 71

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72 73 75

37 37 40 40 41

Contents

The Persistence of Other Limits and a Further Attempt to Overcome Them: The EU Directive 95/2014 and the Integrated Reporting . . . 6.5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ix

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Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76 79 80 83

Chapter 1

Introduction

The main goal of accounting and financial reporting is to assist investors in making economic decisions, including assessing the value of firms in which they have invested (Barth et al. 2005) following the shareholder value approach. Many previous studies on accounting have demonstrated that accounting information that is included in the income statement (IS) and on the balance sheet (BS) plays a leading role in determining market values (Collins et al. 1997; Francis and Schipper 1999; Marquardt and Wiedman 2004), mainly assuming that the net income (or earnings) and book value (of equity) figures are free of reporting biases. According to Barth et al. (2001, p. 77), the value relevance research “assesses how well accounting amounts reflect information used by equity investors.” The accrual-based principle has been always used to record accounting transactions, where the IS and BS represent the main sources of information (Bhandari and Iyer 2013). Thus, various groups of scholars and practitioners that make frequent use of financial ratios as a tool for analysis and planning have focused only on IS and BS, neglecting the power of information that is contained other statements, such as the Cash Flow Statement. The Cash Flow Statement provides an exhaustive summary of the economic, financial, and balance sheet data contained in the BS and IS, which, taken individually, present the limit of not being able to clarify the dynamics that regulate the movements of sources and uses. This dynamic is explained by the quantitative analysis of monetary income and expenditure that is contained in the Cash Flow Statement, which expresses, analytically and organically, the financial flows that facilitate the assessment of a company’s state of health and also highlights the ability to generate or absorb the related monetary resources. The expression “Cash is King” conveys the role that monetary assets play in the entire company system, as well as the ability to monitor the state of health of a company. The document that identifies the “cash” component in all its facets is the Cash Flow Statement. Although the sentence “Cash is King” is broadly shared, the Cash Flow Statement was neglected until the European Union accounting regulators under the Directive © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9_1

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1 Introduction

2013/34/UE.1 For financial statement analysis, BS ratios can only provide a date-intime perspective, and IS ratios can only offer the results of operations for a period of time measuring profits from different natures, but they do not disclose other important changes in resources that result from activities in operating, investing and financing. The Cash Flow Statement represents the cash activity for a continuous period and complements the BS and IS by providing additional information concerning an organization’s ability to operate efficiently, to finance growth, and to pay its obligations. Many scholars have discussed the role of cash flow information on value relevance, particularly Kumar and Krishnan (2008), who found that “operating cash flow” (OCF) is an increasingly important determinant for investment opportunities. There is also a large body of literature that debates how accounting amounts, disaggregated into cash flow and accruals, relate to market values (Barth et al. 2005). Ohlson (1995) elaborated statistical models that link accounting items and market values by assuming a linear relationship between accounting and market values. The aim of this book is to provide empirical evidence on the importance of the Cash Flow Statement for the market value of main European listed companies. Notice that the most important and useful information in statement is the OCF because most companies must generate cash flow from their operating day-to-day business activities. This work reports on an investigation of the value relevance of OCF in the year 2018 as reported under International Financial Reporting Standards (IAS/IFRS) for the 500 largest European Listed Companies belonging to the following main markets: Austria, Belgium, Germany, France, Spain, Ireland, Italy, the Netherlands, and Portugal. In this study, the model is based on the accounting-based valuation theory that was developed by Ohlson (1995), which measures the market value of equity as a function of a firm’s book value, earnings, and other information. Final results indicate that OCF represents a significant variable in explaining the value relevance of the largest European listed companies. These results provide standard setters and companies with relevant evidence supporting the continued requirements for disclosure of cash flow information (Cheng et al. 1997).

1

In the USA in 1973, the Financial Accounting Standards Board (FASB) defined rules that made Cash Flow Statement mandatory under Generally Accepted Accounting Principles (US GAAP) to report sources and uses of funds, but the definition of “funds” was not clear. Net working capital might be cash or might be the difference between current assets and current liabilities. From the late 1970 to the mid-1980s, the FASB discussed the usefulness of predicting future cash flows. In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide Cash Flow Statements. In 1992, the International Accounting Standards Board issued International Accounting Standard 7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide Cash Flow Statements.

1 Introduction

3

To contribute to this academic debate, this book has a threefold purpose. First, it aims to empirically verify how the combination between accrual and cash-based information leads to a greater value relevance of the European listed companies. An important factor is found to be significant, which is measured by OCF, which plays a key role as one of the “ingredients in the recipe” and contributes to achieving higher levels of value relevance. Second, it seeks to empirically test the effects produced by the introduction of a cash measure using two steps of statistical regressions and interpreting results in the empirical chapter. The aim is to test the significance of the OCF variable and to verify whether the reliability of the extended model increases. Third, this is a recent study testing the value relevance of accruals and cash flow information in the European context, covering the last available year of 2018. The analysis suggests that the accounting choice may confuse investors, who have reduced confidence in accounting earnings and book value; currently, European investors rely more on cash flow instead of accrual numbers.

*** The Cash Flow Statement, while representing a further step toward improving financial reporting, has some limitations that may be overcome by regulatory measures, such as Directive 2014/95/EU. This directive aims to provide users with more complete information including not only accounting and financial information but also social, environmental, intellectual, human, and governance information. The presentation of cash values improves the informative scope of the financial statements, but the difficulty of having to isolate significant financial figures, from economic figures that depend on the principle of accrual accounting, remains. This is why the Cash Flow Statement is designed to present the events of a period from a different point of view from that of the income statement. It is much freer from estimates and forecasts, although it always remains conditioned by the classification and valuation criteria that are used in the financial statements. This Cash Flow Statement represented a turning point in the understanding of the scope of information that is contained in the financial statements to the extent that it has the capacity, through the classification of changes in equity and financial figures, to restore the dimension of “dynamism” to financial management that had disappeared through the “static” representation of the balance sheet. The Cash Flow Statement, therefore, suggests, as its main objective, representing “dynamic” elements that allow formulation of assessments on the level of the company’s growth and on the functioning of the financial balance, degree of liquidity, and company solvency. This study is consistent with other studies (Charitou et al. 2000; Cheng et al. 1997), which showed that cash flows play a more important role in the European and US capital markets. A major motivation for this book was to extend previous research from the USA to examine the information content of earnings and cash flows in the largest European companies using the Ohlson model that incorporates the possible effects of earnings and cash flow on market value. This study will hopefully stimulate further research that may improve the understanding of the role of earnings and cash flow to explain market values. This analysis

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suggests that there are similarities between the main European markets and the USA that are related to the incremental information content of earnings and cash flows and the relevance of the earnings permanence hypothesis in both capital market settings. In conclusion, future contributions could usefully compare the joint role of earnings and cash flows in explaining security returns in these and other capital markets using methodologies that allow a more detailed assessment of the impact of accounting practices on earnings and cash flow response coefficients.

References Barth ME, Cram DP, Nelson KK (2001) Accruals and the prediction of future cash flows. Account Rev 76(1):27–58 Barth ME, Beaver WH, Hand JR, Landsman WR (2005) Accruals, accounting-based valuation models, and the prediction of equity values. J Acc Audit Financ 20(4):311–345 Bhandari SB, Iyer R (2013) Predicting business failure using cash flow statement based measures. Manag Financ 39(7):667–676 Charitou A, Clubb C, Andreou A (2000) The value relevance of earnings and cash flows: empirical evidence for Japan. J Int Financ Manag Acc 11(1):1–22 Cheng CA, Chao-Shin L, Schaefer TF (1997) The value-relevance of SFAS no. 95 cash flows from operations as assessed by security market effects. Account Horiz 11(3):1 Collins DW, Maydew EL, Weiss IS (1997) Changes in the value-relevance of earnings and book values over the past forty years. J Account Econ 24(1):39–67 Francis J, Schipper K (1999) Have financial statements lost their relevance? J Account Res 37 (2):319–352 Kumar KR, Krishnan GV (2008) The value-relevance of cash flows and accruals: the role of investment opportunities. Account Rev 83(4):997–1040 Marquardt CA, Wiedman CI (2004) How are earnings managed? An examination of specific accruals. Contemp Account Res 21(2):461–491 Ohlson J (1995) Earnings, book values, and dividends in equity valuation. Contemp Account Res 11(2):661

Chapter 2

The Cash Flow Statement Under IAS/IFRS

2.1

A Brief History of Cash Flow Reporting Under IAS 7

Many jurisdictions have obliged the disclosure of a Cash Flow Statement as a separate quantitative report of the financial statements (Akbar et al. 2011). In the USA in 1973, the Financial Accounting Standards Board (FASB) specified rules that made it mandatory under Generally Accepted Accounting Principles (US GAAP) to disclose sources and uses of funds, but the definition of “funds” was not clear. Net working capital might be cash or might be the difference between current assets and current liabilities. From the late 1970 to the mid-1980s, the FASB discussed the usefulness of predicting future cash flows. In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide Cash Flow Statements. In 1992, the International Accounting Standards Board issued International Accounting Standard 7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide Cash Flow Statements. IAS 7 rules for Cash Flow Statements are presented below. • IAS 7 requires that the Cash Flow Statement include changes in both cash and cash equivalents. • IAS 7 permits bank borrowings (overdraft) in certain countries to be included in cash equivalents rather than being considered a part of financing activities. • IAS 7 allows interest paid to be included in operating activities or financing activities. The IASC allows either method, but it strongly recommends using the direct method. The IASC considers the indirect method to be less clear to users of financial statements. Cash Flow Statements are most commonly prepared using the indirect method, which is not especially useful in projecting future cash flows. Given this brief history, the relevance of communicating information on earnings is divided into different portions of cash flows, current accruals, and non-current accruals, which has been much discussed among scholars and practitioners, together © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9_2

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with the need to understand whether such information is supportive for forecasting future cash flows and valuing firms.

2.2

The General Content of Cash Flow Statement Under IAS 1

IAS 1 (art. 1) provides the content for: the basis for presentation of general purpose financial statements, to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. To achieve this objective, this standard sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. The recognition, measurement and disclosure of specific transactions and other events are dealt with in other standards and in interpretations.

Additionally, in IAS 1 (art. 7), there is the following guideline about the structure of financial statements: Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: (a) (b) (c) (d) (e) (f)

assets; liabilities; equity; income and expenses, including gains and losses; other changes in equity; and cash flows.

Lastly, IAS 1 (art. 8) also provides some contents on the components and statements that are to be presented as follows: • A balance sheet • An income statement • A statement of changes in equity showing either – All changes in equity or – Changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders • A Cash-Flow Statement • Notes, including a summary of relevant accounting policies and other explanatory issues The accrual-based principle of accounting is also mentioned in art. 25, which is related to the preparation of statements, except for cash flow information, and in

2.4 The Definition of Cash and Cash Equivalents

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particular “an entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.” Finally, art. 42 indicates that the standard IAS 1 “requires particular disclosures on the face of the balance sheet, income statement and statement of changes in equity and requires disclosure of other line items either on the face of those statements or in the notes. IAS 7 Cash-Flow Statements sets out requirements for the presentation of a Cash-Flow Statement.” Thus, after introducing some general content about the Cash Flow Statement, which is described above, the IAS 1 leaves the specific explanatory content and structure to the IAS 7—Cash Flow Statement.

2.3

The Content of IAS 7: Cash Flow Statement

The purpose of accounting standard IAS 7 is to govern the criteria for the preparation and presentation of the Cash Flow Statement. Cash is the financial resource that is used as a reference for the preparation of the Cash Flow Statement, and it offers useful information to assess the company’s financial situation (including liquidity and solvency) during the financial year concerned and its changes in future financial years. The Cash Flow Statement also provides information on: (a) Cash generated/absorbed by operating activities and procedures for use/coverage (b) The company’s ability to address short-term financial obligations (c) The company’s ability to fund itself internally The original version of IAS 7 was first reissued in December 1992, with the International Accounting Standards Board (IASB) adopting the standard in April 2001. It was also retitled in September 2007, and it is operative for financial statements covering periods beginning on or after 1 January 1994. IAS 7 is shorter and more brief than the new and revised standards, which have been issued more recently by the IASB. It has also been subjected to a few changes since it was issued, which are reported in Table 2.1.

2.4

The Definition of Cash and Cash Equivalents

The IAS 7.6 contains the following definitions: ‘Cash’: •

Cash on hand (physical currency held)

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Table 2.1 The phases of IAS 7 implementation June 1976 October 1977 July 1991 December 1992 January 1994 September 2007 April 2009 July 2009 January 2010 January 2016 January 2017 •

Exposure Draft E7 Statement of Source and Application of Funds IAS 7 Statement of Changes in Financial Position Exposure Draft E36 Cash Flow Statements IAS 7 Cash Flow Statements Effective date of IAS 7 (1992) Retitled from Cash Flow Statements to Statement of Cash Flows as a consequential amendment resulting from revisions to IAS 1 IAS 7 amended by Annual Improvements to IFRSs 2009 with respect to expenditures that do not result in a recognized asset Effective date for amendments from IAS 27 (2008) relating to changes in ownership of a subsidiary Effective date of the April 2009 revisions to IAS 7 Amended by Disclosure Initiative (Amendments to IAS 7) Effective date of the January 2016 revisions to IAS 7

Demand deposits1 ‘Cash equivalents’:

•

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

IAS 7.7 establishes that cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes, and in particular: . . . an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.

For “short-term maturity,” the 3-month period to maturity based on the date on which an entity acquires an asset is considered short term. Thus, a 1-year fixed term deposit cannot be identified as a cash equivalent when the period to maturity has reached 3 months. For investments in equity instruments, they are not identified as cash and cash equivalents, because they typically have no maturity and are subject to significant

1 According to BDO—IFRS in Practice. IAS 7 Statement of Cash Flow. Accessed file:///C:/Users/ Hp/Downloads/IFRS_IAS7_print.pdf at page 4: “In order to qualify the demand deposits as cash, the related balance needs to have the same liquidity as cash itself, and so funds on ‘demand deposit’ need to be capable of being withdrawn at any time without penalty. In general, deposits which can be withdrawn without penalty within 24 h, or one working day, are regarded as being demand deposits. These include amounts deposited at financial institutions (such as funds in a bank current account), and may extend to cover deposits at non-financial institutions such as legal advisers, if funds are held for client in separate and designated accounts that can be called upon by the client at any time. If a deposit does not qualify to be regarded as cash, it may qualify to be classified as a cash equivalent.”

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potential changes in value. If an investment is related to a purchase that has a short period remaining until its maturity date (i.e. redeemable preference share), this can meet the definition of a cash equivalent.

2.5

The Preparation of Cash Flow Statement

Cash flow must be analyzed between operating, investing, and financing activities [IAS 7.10], and the key principles that are specified by IAS 7 for the preparation of a Cash Flow Statement are reported below. Operating activities are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.

It is assumed that the “operating” section includes only cash flows that arise from an entity’s principal revenue-producing activities. However, because cash flows arising from operating activities represent a residual category that includes any cash flows that do not qualify to be recorded within either investing or financing activities, these can include cash flows that may initially not appear to be “operating” in nature (i.e., cash inflows from other revenue sources that are not from the sale of goods or rendering of services, such as proceeds from an insurance claim).2 The following are examples of cash flows that are generated or absorbed by operating activities: • Cash receipts from the sale of goods and the rendering of services • Proceeds from royalties, fees, compensation, insurance reimbursements, and other revenues • Payments for the purchase of raw materials, semi-finished goods, merchandise, and other production factors • Payments for the purchase of services • Cash payments to and on behalf of employees • Tax payments and reimbursements • Proceeds from financial income Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Investing activities generally include the purchase and disposal of its intangible assets, property, plants, equipment, and interests in other entities that are not held for trading purposes. However, cash flows from investing activities do not include those arising from changes in ownership interest for subsidiaries that do not result in a change in control, which are classified as arising from financing activities. Investing activities may also include cash flows that are associated with the drawdown and BDO—IFRS in Practice. IAS 7 Statement of Cash Flow. Accessed file:///C:/Users/Hp/Downloads/ IFRS_IAS7_print.pdf

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repayment of inter-company and other loans (provided that the entity’s principal activities do not include the lending of funds). According to IAS 7.14, in case there are cash flows that are related to the sale of leased assets (when the entity is the lessor), these must be classified as operating activities. Cash flows generated or absorbed by investing activities shall include investing activities from: • Purchases or sales of buildings, plants, equipment, or other tangible assets (including tangible assets constructed internally) • Purchases or sales of intangible assets including patents, trademarks, and concessions, and these payments shall also include those related to capitalized multiyear costs • Purchases or sales of equity investments in subsidiaries and associates • Purchases or sales of other equity investments • Purchases or sales of other securities including government securities and bonds • Advances and loans that are made to third parties and collections from their repayment Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

An entity’s financing activities include the following: • • • •

Issuing and repurchase by an entity of its own share capital Distributions (dividends) paid to equity shareholders Drawdown and repayment of borrowings from third parties Any other cash flows related to items classified in equity

For the interest and dividends that are received and paid, IAS 7.31 requires those categories to be disclosed separately and allows each of them to be classified within either operating, financing, or investing activities. The classification chosen must be applied consistently from period to period. Cash flows generated or absorbed by financing activities include: • Proceeds from the issuance of shares or equity interests • The payment of dividends • Payments for the redemption of equity, including in the form of the purchase of treasury shares • Cash proceeds or payments from issuing or repaying bonds and fixed-income securities and from obtaining or repaying mortgage loans and other short-term or long-term borrowings • An increase or decrease in other short- or medium-term payables of a financial nature The most important type of cash flows is those from operating activities that represent the entity’s main revenue-producing activities that are not investing or

2.5 The Preparation of Cash Flow Statement

11

Table 2.2 The basic structure of Cash Flow Statement Cash Flow Statement (a) Cash flows from operating activities (b) Cash flows from investing activities (c) Cash flows from financing activities (d) Net cash flows (A  B  C) (e) Cash and cash equivalents at the beginning of the period (f) Cash and cash equivalents at the end of the period (D  E)

financing activities, so operating cash flows include cash that is received from customers and cash paid to suppliers and employees. For cash flows from operating activities, IAS 7 establishes two alternatives for representation, using the direct and indirect methods. The direct method presents the main categories of gross receipts and payments. However, the indirect method, which starts from the profit or loss for the year, adjusts all the items originating from non-financial transactions. In addition, IAS 7 suggests, without imposing any obligation, to adopt the direct method because this representation allows the information that is provided to be used for the quantification of the cash flows, and it is much more accurate than using the indirect method, although the latter is the most widely used in accounting practice. This difference proposed between the direct and indirect methods provided by IAS 7 is driven by the complexity of developing the direct method of expressing sophisticated information and accounting systems that require open balances that control each collection/payment. Therefore, very rarely do companies, especially small ones, use the direct method without taking into account the advice of IAS 7 (Table 2.2 and Figs. 2.1 and 2.2). The cash flows from different categories (A, B, and C) make it possible to reconcile the balance of cash and cash equivalents between the beginning (E) and the end of the period (F). The classification of flows into the three different categories is often difficult and complex to interpret, and it is affected by the operator’s judgment about the nature of monetary movement. The application of IAS 7 provides information on the appropriateness of the following: • Pay attention to the classification of cash flows generated by operating, investing, and financing activities in the manner that is most appropriate to the activity that is performed by the issuer • Provide information that enables readers of the financial statements to assess the criteria to classify the cash flows IAS 7.18 requires an entity to present its cash flows from operating activities using either the direct or the indirect method. The cash flow from operating activities may also be determined using the direct method by presenting gross positive and negative cash flows from transactions as being included in operating activities.

12

2 The Cash Flow Statement Under IAS/IFRS

Fig. 2.1 An example of Cash Flow Statement under indirect method. Source: PwC (2018, p. 18) https://www.pwc.com/mt/en/StudentMaterial/2018/IAS%207%20-%20Powerpoint.pdf

The direct method indicates the main categories of gross cash receipts and gross cash payments. The following table shows the section related to the operating cash flows using the direct method: +Cash receipts from customers Cash paid to suppliers

XXX XXX

2.5 The Preparation of Cash Flow Statement

13

Fig. 2.2 An example of Cash Flow Statement under direct method. Source: PwC (2018, p. 18) https://www.pwc.com/mt/en/StudentMaterial/2018/IAS%207%20-%20Powerpoint.pdf

Cash paid to employees Cash paid for other operating expenses Interest paid Income taxes paid =Cash flows from operating activities

XXX XXX XXX XXX XXX

However, the indirect method adjusts the accrual basis net profit or loss for the effects of non-cash operations. The table below shows the operating cash flows section using the indirect method: Earnings before interest and income taxes (EBIT) +Non-monetary costs (i.e., depreciation) Non-monetary revenues Increase/decrease in trade receivables

XXX XXX XXX XXX

Increase/decrease in inventories

XXX

Increase/decrease in other current operating assets

XXX

Increase/decrease in trade payables

XXX

Increase/decrease in other current operating liabilities

XXX

Interest expense paid +Interest revenue received Income taxes paid =Cash flows from operating activities

XXX XXX XXX XXX

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2 The Cash Flow Statement Under IAS/IFRS

Cash flows from operating activities shall be determined using the indirect method, based on which, the profit (or loss) before interest and taxes, shall be adjusted to reflect: • Non-cash elements, meaning accounting entries that required no disbursement/ receipt of cash during the financial year and that had no balancing entry in net working capital. These include the amortization/depreciation of fixed assets, provisions for risks and charges, impairment losses, etc. • Changes in net working capital related to the costs or revenues from operating activities. These include changes in inventories, changes in trade receivables and trade payables and other current operating assets and liabilities.

2.6

Specific Issues of Cash Flow Classification

IAS 7 provides some specific rules for the exposure of the following financial flows: Cash flows in foreign currency Interest and dividends collected/distributed Income taxes Cash flows from purchase/sale of equity investments Cash flows from acquisition and disposal of subsidiaries and/or other business branches (f) Cash flows relating to public contributions

(a) (b) (c) (d) (e)

2.6.1

Cash Flows in Foreign Currency

They must be shown in the “functional currency” of the company by applying the exchange rate between the functional currency and the foreign currency of the day on which the cash flow occurs to the amount in foreign currency (IAS 7, par. 25). These flows must be recognized in accordance with the provisions of IAS 21 “Effects of Changes in Foreign Exchange Rates” (IAS 7, Paragraph 27). In addition, IAS 7 states in paragraph 28 that “unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows.” Unrealized foreign exchange gains or losses may arise from translating “cash or cash equivalents” into foreign currency at the year-end exchange rate. To reconcile the value of cash and cash equivalents at the beginning and at the end of the year, the impact of changes in foreign currency exchange rates must be shown in a separate item in the statement of financial position, separately from cash flows from operating, investing, and financing activities. The format is amended as follows: (a) Cash flows from operating activities

2.6 Specific Issues of Cash Flow Classification

(b) (c) (d) (e) (f) (g)

15

Cash flows from investing activities Cash flows from financing activities Net flow (A  B  C) Effect of exchange rate changes Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period (D  E  F)

If, for example, cash and cash equivalents generate unrealized foreign exchange gains, the statement shall show “foreign exchange gains” in operating activities (downward adjustment as a positive non-monetary income component). To reconcile the value of cash and cash equivalents at the beginning and end of the period, the Cash Flow Statement must also show separately the positive effect of the “foreign exchange gain” of the same amount, as shown in the table.

2.6.2

Interest and Dividends Collected/Distributed

The cash flows arising from the collection/distribution of interest and dividends must be: • Indicated separately • According to their nature, shown in operating, investing, or financial activities For financial institutions, interest and dividends are part of operating activities (IAS 7, par. 33). For other companies, there is no general rule; however, IAS 7 provides the following guidelines: (a) Total interest expense paid during the period must be shown separately in the statement, and whether it is recognized as an expense or capitalized must be indicated, in accordance with IAS 23 “Borrowing Costs.” (b) Interest expense paid during the period may be recognized as an operating asset because it forms part of the determination of profit or loss for the period. Alternatively, they may be shown under financial assets as expenses incurred to increase financial resources. (c) Dividends that are distributed may be reported either as a cash flow from financial assets because they represent a charge for raising financial resources or as a cash flow from operating activities to assist readers in determining a company’s ability to distribute dividends from operating cash flows. (d) Dividends received may be recognized as a cash flow from operating activities because they are included in the determination of profit or loss for the period. Alternatively, they may be reported as investment activities to the extent that they are treated as investment income (Table 2.3).

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2 The Cash Flow Statement Under IAS/IFRS

Table 2.3 Interests and dividends according to IAS 7 Type of cash flow Interest paid Interest received Dividends paid Dividends received

2.6.3

Classification Cash flow from operating activities or cash flow from financing activities Cash flow from operating activities or cash flow from investing activities Cash flow from operating activities or cash flow from financing activities Cash flow from operating activities or cash flow from investing activities

Income Taxes

Cash flows arising from income taxes should be shown separately as cash flows from operating activities, unless they relate to investing or financing activities. Normally, they are considered to be cash flows of an operating nature. (a) Cash flows from operating activities Operating Profit Non-cash items ... Income taxes (b) Cash flows from investing activities (c) Cash flows from financing activities (d) Net flow (A  B  C) (e) Cash and cash equivalents at the beginning of the period (f) Cash and cash equivalents at the end of the period (D  E  F)

2.6.4

Cash Flows from the Purchase/Sale of Equity Investments

For cash flows arising from purchase/disposal of investments in subsidiaries, associates, or joint ventures, reference should be made to the following: • Equity investments that are recorded using the equity or cost method: the company that owns the investment must indicate separately the flows relating to dividends received, advances, loans granted or obtained, and capital subscriptions or repayments. • Investments in joint ventures (IAS 31) that are accounted for using the proportionate consolidation method: the company must include in the Cash Flow Statement the proportionate share of the cash flows realized by the subsidiary, pertaining to the parent company. • Investments in jointly controlled entities (IAS 31) that are accounted for using the equity method: the company must present the cash flows relating to its jointly controlled interest and the distributions and other payments/receipts between itself and the jointly controlled entity.

2.7 The “Disclosure Initiative” of IAS 7

17

Table 2.4 Acquisition/disposition of subsidiaries and branches according to IAS 7 Type of cash flow Acquisition of business branch Disposition of business branch

2.6.5

Classification Cash flow from investing activities Cash flow from investing activities

Cash Flows from Acquisition and Disposal of Subsidiaries and/or Other Business Branches

The resulting cash flows are shown separately under investing activities. The value of cash received/payments that are made as consideration for disposal/purchases must be shown in the statement net of cash and cash equivalents that are acquired or disposed of. Cash flows arising from the disposal cannot be deducted from those arising from the acquisition. In addition, the company must disclose certain additional information in a specific note to the Statement of Cash Flows, as follows: • The total consideration for purchases and disposals • The part of the consideration paid or collected through cash and cash equivalents • The value of the cash and cash equivalents of the subsidiary or operating division that is acquired or disposed of • The amount of assets and liabilities other than cash and cash equivalents of the subsidiary and of the operating division that were purchased or disposed of, referring to each category (Table 2.4).

2.6.6

Cash Flows Relating to Public Contributions

Cash flows arising from government capital grants must be shown separately under investing activities with the objective of showing gross investment in assets, regardless of whether or not the grant is deducted from the value of the related asset in the balance sheet.

2.7

The “Disclosure Initiative” of IAS 7

The IAS 7 requires some disclosures. First, further disclosures are required to indicate the amount of significant balances of cash and cash equivalents that are held by the company, but which cannot be freely used (e.g., cash relating to transfers of liquidity between countries with certain restrictions). Second, it is recommended (not mandatory) to indicate certain information in the report, including:

18

2 The Cash Flow Statement Under IAS/IFRS

(a) The amount of credit facilities that are required for future operating activities and to settle capital commitments, indicating any restrictions on the use of such credit facilities (b) The total amount of the cash flows of each of the three categories (operating, investing, and financing) relating to investments in joint ventures presented using the proportional method of consolidation (c) The total amount of cash flows arising from each of the three above categories for each reportable segment (see IFRS 8 Operating Segments). With the Disclosure Initiative (DI) project, the IASB promoted an initiative aimed at improving disclosure of the notes to the IFRS financial statements. The DI proposals concern certain amendments to the following accounting standards: • IAS 1 “Presentation of Financial Statements” (amendments published in December 2014 with effect from the accounting years from 01.01.2016) • IAS 7 “Statement of Cash Flow” (Exposure Draft in December 2014) • IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” (Exposure Draft published in January 2016) The purpose of the amendments to IAS 7 that are being discussed is to: • Enrich the information provided directly to the users of the financial statements on the financing activities of a company, excluding equity items, by reconciling all sources of loan capital • Provide information on the restrictions on cash and cash equivalents (with regard to this point, the content of which is still under discussion, the IASB published the narrow-scope amendment relating to a company’s restrictions on the use of cash components provided for by IAS 7 “cash and cash equivalents”). In January 2016, the IASB published (October 2015, the Exposure Draft) a standalone amendment to IAS 7, within which the reconciliation of liabilities arising from external financing activities is structured: the IAS/IFRS adopters will be required to provide information regarding the changes that occurred from the beginning to the end of the period in external financing activities (banking, leasing, etc.) that did not have to be recorded among the cash flows of financing activities (payment of financial liabilities, dividends, etc.). Information regarding non-cash changes is also provided. The changes have already come into force for the financial years starting from 1 January 2017. The main amendments to the DI relate to paragraph 44, which requires disclosure of changes in the liabilities that arise from financing activities (cash and non-cash changes), with particular regard to: (a) Changes in the financing activities “cash changes” (payment of the installments of a loan or a financial lease) (b) Changes related to the acquisition or loss of control of an entity (loans acquired in a business combination)

2.8 The Offsetting of Cash Flows

19

(c) The impact on cash flows of changes in foreign exchange rates (Foreign Exchange Rates) (d) Changes in fair value, generally relating to financial assets hedging loans (hedges) For the changes described above, paragraph 44 provides a table showing the reconciliation between opening and closing balances of changes in financial liabilities. The information contained in the reconciliation statement shall enable users of the financial statements to match the items in the statement with the balance sheet and Cash Flow Statement. The new IAS 7 also contains some illustrative examples to assist users, such as the addition of the “Note to the Statement” in the table below, according to which the liabilities to be included will be those whose cash flows that arise from financing activities according to the current definition contained in IAS 7—Statement of Cash Flows.

2.8

The Offsetting of Cash Flows

IAS 1 paragraph 32 forbids offsetting assets and liabilities, income, and expenses unless this is required or permitted by an IFRS. The offsetting of cash flows is established by the IAS 7 from paragraph 13 to 17, which set out the requirements for individual cash inflows and outflows that are to be reported separately for operating, investing, and financing activities. Offsetting cash inflows and outflows is not allowed (except in limited circumstances that are relevant for financial institutions), meaning that additional and separate disclosure is required for gross cash flows, including those related to: • The purchase and sale of intangible assets, and items of property, plant and equipment • The drawdown and repayment of borrowings • The lending of funds to third parties and the repayments associated with those loans Furthermore, IAS 7 paragraph 24 allows the following financial institution cash flows to be reported on a net basis: • Cash receipts and payments for deposits with a fixed maturity date • Deposits placed and withdrawn from other financial institutions • Cash receipts and payments for cash advances and loans For the sake of clarity, it is considered appropriate to introduce a further illustrative example (Fig. 2.3), which highlights a draft structure and helps to understand and interpret the information required by paragraph 44 of IAS 7. Figure 2.4 shows, in addition to the monetary changes resulting from short-term and long-term loans and the collection of the related assets that are held to hedge

20

2 The Cash Flow Statement Under IAS/IFRS

Fig. 2.3 Illustrative example of financial liabilities reconciliation and notes on the statement of cash flows (direct and indirect method). Source: Disclosure Initiative—Amendments to IAS 7 by the IASB in January 2016

Fig. 2.4 Illustrative example of financial liabilities reconciliation and notes on the Statement of cash flows (direct and indirect method). Source: Disclosure Initiative—Amendments to IAS 7 by the IASB in January 2016

long-term borrowing, that there are also the changes that have not produced any monetary effect, making it easier for the reader to obtain satisfactory information. Thus, the amendments to IAS 7 of the Disclosure Initiative aim to highlight all the changes (cash changes and non-cash changes) in the liabilities that derive from financing activities, thereby assisting the reader who should have found such information in the notes to the financial statements. The new provisions introduced by the Disclosure Initiative on IAS 7 have a significant function because they can capture in a note the changes between the initial balance and the final balance of the liabilities that are derived from financing activities, making the reconciliation between the indebtedness at the beginning and at the end of the year immediate rather than obliging the user of the financial statements to look for the various information in the explanatory notes to the financial statements.

References

21

The importance of the new features allows readers of the financial statements to be in possession of information that is aimed at improving their ability to analyze current and forecast financial flows and to understand the financial risks associated with them.

2.9

Conclusions

The ever-increasing business globalization puts pressure on accounting standard setters and governments in order to align accounting requirements worldwide. Governments, multinational companies, and private standards setter have tried to solve this situation foster the adoption of IFRS and its linked harmonization in order to create one set of high-quality accounting rules (Das et al. 2009; Dewing and Russell 2008; Jaafar and McLeay 2007; Königsgruber 2010; Macías and Muiño 2011; Schipper 2005). The purpose of the IASB, through the adoption of IAS/IFRS, is precisely to develop a process of convergence toward a common accounting language that is widespread among all countries. The Cash Flow Statement is an integral part of all sets of financial statements prepared in accordance with international accounting standards, as are the balance sheet, the income statement, the statement of changes in shareholders’ equity, and the explanatory notes. The statement of cash flows must be presented by all companies that adopt IAS/IFRS, regardless of the type of sector to which they belong (industrial, commercial, or financial) and regardless of the fact that cash and cash equivalents can be considered the “finished product” of the company, as in the case of financial institutions.

References Akbar S, Shah SZA, Stark AW (2011) The value relevance of cash flows, current accruals, and non-current accruals in the UK. Int Rev Financ Anal 20(5):311–319 BDO (2014) IFRS in practice. IAS 7 statement of cash flow. Accessed file:///C:/Users/Hp/Downloads/IFRS_IAS7_print.pdf Das B, Pramanik AK, Shil NC (2009) Harmonization of accounting standards through internationalization. Int Bus Res 2(2):194–201 Dewing I, Russell PO (2008) Financial integration in the EU: the first phase of EU endorsement of international accounting standards. J Common Mark Stud 46(2):243–264 Jaafar A, McLeay S (2007) Country effects and sector effects on the harmonization of accounting policy choice. Abacus 43(2):156–189 Königsgruber R (2010) A political economy of accounting standard setting. J Manag Gov 14 (4):277–295 Macías M, Muiño F (2011) Examining dual accounting systems in Europe. Int J Account 46 (1):51–78 Schipper K (2005) The introduction of international accounting standards in Europe: implications for international convergence. Eur Account Rev 14(1):101–126

Chapter 3

The Historical Background of Cash Flow Statement: First Evidences and Contributions

3.1

The First Companies to Present a Report on Cash Flow

In the past, the Cash Flow Statement has always been an accompanying document to the traditional financial statements, acting as a stand-alone document with the aim of highlighting the level of liquidity and solvency, which is of particular importance for those outsiders who have provided capital. The financial statements (Balance Sheet and Income Statement), although inevitably presented in a simplified manner, were prepared to highlight the changes in the balance sheet components that moved monetary resources within a period and, consequently, reconciled cash at the beginning and end of the period. The objective has remained consistent over subsequent decades and up to the present day. The first trace of a Cash Flow Statement dates back to the second half of the nineteenth century, when some large US and British companies, together with the preparation of the classic financial statements of “Income Statement” and “Statement of Financial Position,” provided an accompanying document that was similar to a Cash Flow Statement. In 1862, the Assam Company closed its financial statements as of March 31 with an accompanying statement showing changes in cash and cash equivalents (Rosen and DeCoster 1969). Similarly, in the following year, 1863, the US company Northern Central Railroad prepared a statement showing cash at the beginning of the year adjusted downward and upward in the three main categories of cash inflows/outflows until the end of the period, without referring to the three categories: operating, investment, and financing. In a subsequent period, other forms of the Cash Flow Statement were proposed, taking as a starting point the comparative changes in other financial resources, distinguishing between their nature and destination. In 1881, the American Bell Telephone Company presented a Cash Flow Statement for the period within which operations deriving from operations were © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9_3

23

24

3 The Historical Background of Cash Flow Statement: First Evidences and. . .

deliberately “isolated” from all others. The objective was to communicate to its stakeholders the total cash flows that were generated/absorbed and those originating from the normal course of business, which was the operating activity. In 1893, the Missouri Pacific Railway Company prepared a prospectus called “Statement showing Resources and their Application” with two opposing sections (“Resources” and “Application of Resources”) that summarized the changes in all balance sheet components. Furthermore, the US Steel Corporation was the first to draw up a statement of cash flows in 1902, highlighting those arising from operational/revenue management starting from net income and adjusting it for all non-monetary items up to net “monetary” income. This approach is based on today’s indirect method of reporting. As evidenced by the company cases above mentioned, at the beginning of the last century, there was a growing awareness that, in Anglo-Saxon business practices, the drafting of an analytical document that was representative of the financial dynamics could be of fundamental importance, especially for financial statement analysis. Such documents, however, differed greatly, both in relation to the structure and content of the financial object.

3.2

The First Works by Greene (1897) and Cole (1908)

The first contributions that raised the need to adopt a Cash Flow Statement were formulated by Greene (1897) and Cole (1908). Greene conducted research on the financial statements of the US railways by preparing a financial document “Summary of changes in Financial Position.” However, the first study of purely scientific value that dealt with the financial statement proposing an analytical structure is that of Cole, who was the first scholar to represent the operation of a new statement of changes in capital in a single text. The structure that Cole provides is based on the differences that can be found between the values of each individual item of the two-section balance sheet (the “Where-Got Where-Gone Statement”) by combining two consecutive balance sheets. In the left-hand section, increases in assets and decreases in liabilities were recorded under the “Where gone” category, while decreases in assets and increases in liabilities were recorded under the “Where got” category. Again in 1921, Cole used the names “Summary of Balance Sheet Changes” for the statement and “Application of Values” and “Source of Values” for the two sections, respectively (Fig. 3.1). Although this structure represented a promising starting point, some shortcomings emerged to the extent that, within the prospectus, simple variations in sources and uses could be provided without any elaboration of the variations in question. This study, according to Mechelli (2008), was an isolated work within the financial statements in which Cole intended to provide “a useful explanatory element, rather than a prospectus with its own and independent informative value.”

3.3 The Contribution of Finney

25

Fig. 3.1 Where-got where-gone statement. Source: Kempner (1956, p. 14)

As already mentioned, another author, Greene, published a work in 1897 relating to a research on the financial statements of the railways in which he mentioned a prospectus called “Summary of Changes in Financial Position.” Here, he highlighted two sections, “Expenditures: for what purpose incurred” and “Resource: whence derived,” with the changes in the balance sheet components of two consecutive situations, and classified them according to the criteria “increases assets/liabilities decreases” and “decreases assets/liabilities increases” (Kafer and Zimmerman 1967; Rosen and DeCoster 1969).

3.3

The Contribution of Finney

Cole’s statement of accounts was considered to be rather simplistic and approximate, with the aim of analyzing, in greater detail, a financial statement and examining all changes in the balance sheet. This purpose had an “interpretative” rather than a “representative” nature. The following years were not characterized by further contributions, although the Cash Flow Statement began to spread among companies and to be used.

3 The Historical Background of Cash Flow Statement: First Evidences and. . .

26

In 1914, the “Students’ Department” was established within the editorial of “The Journal of Accountancy,” with the aim of providing preparation for Certified Public Accountant examinations; this department assumed an important role in a leading international journal on accounting and financial statement issues. Additionally, 1914 was the year that another work was published by Esquerre (1914, 1925), which provided a statement of accountancy that was very similar to Cole’s, with a difference in the names of the opposing sections: “Resources obtained through” and “Resources applied to.” Subsequently, Paton and Stevenson (1922) also provided a statement that was similar to Cole’s, renaming the two sections “Sources from which Assets are obtained” and “Utilization of Assets” without detailing changes in asset components. The statement proposed by Finney (1923) was based on a liquidity perspective, unlike Cole who proposed a statement based on differences in balance sheet items, as already explained. With this new format for statement of accounts, reference is made to a statement in which, given an aggregate of balance sheet items, the cash flows that changed the amount within a given period (Finney 1923). Again, according to Finney, the main aggregate was represented by the Net Working Capital, a margin size that has the capacity to express all events of an operational–management nature that absorbed or generated cash (Statements of Application of Funds). Finney’s contribution was appreciated by Potito (1980, p. 22): Finney explicitly stated that the simple reclassification of the changes found by comparing two successive balance sheets does not clarify the changes in the company’s financial conditions. It is necessary to group the changes relating to certain categories of balance sheet items. Distinguish those relating to fixed assets from those relating to working capital, considered as a single whole. The overall change in the latter is then analysed in a special attachment (‘Statement of Changes in Working Capital’).

The following representations show the question proposed by Finney in 1921 (Finney 1923) to the American Institute of Accounting (AIA) with the solution to the case (Figs. 3.2, 3.3, 3.4, 3.5 and 3.6).

3.4

The Next Phase of Finney’s Work

The years following Finney’s works were characterized by a wide diffusion and strengthening of the perspective that was adopted by the author with the affirmation of the term “Funds,” which replaced the term “Resources.” Bliss (1923) provided a similar approach to that of Finney by analyzing the balance sheets of companies in 1916–1921, with the aim of assessing the evolution of liquidity and financial solvency through the configuration of a significant size and net working capital. He also suggested a Cash Flow Statement that showed the changes in current assets gross for short-term liabilities, taking into consideration that the working capital configuration did not allow short-term bank debts to be

3.4 The Next Phase of Finney’s Work

27

Fig. 3.2 Solution proposed by Finney to the question of AIA (Exhibit A—part 1). Source: Kempner (1956, pp. 234–238)

carried forward, although this event represented a significant part of the monetary resource sources. At that time, there were two schools of thought on how to report: 1. The traditionalists, who remained faithful to the representation of each item of the patrimonial type: Gilman (1925) and Guthmann (1950). 2. Those who embraced the approach of reporting as an analysis of working capital flows: Kholer and Morrison (1931) and Paton (1922 and 1941). Hatfield (1927) proposed an intermediate configuration and provided a document of the variations of all the components that distinguished current assets and liabilities from all the others. Gregory (1928) presented a table with items that were classified into categories, including current assets and liabilities. A few years later, Kester (1933, p. 750) finally returned to the Cash Flow Statement based on the analysis of working capital, presenting a scheme aimed at analyzing the items within which working capital was separated and classified

28

3 The Historical Background of Cash Flow Statement: First Evidences and. . .

Fig. 3.3 Solution proposed by Finney to the question of AIA (Exhibit A—part 2). (Source: Kempner (1956, pp. 234–238))

separately. Kester’s schemes represent the evolution of the models that were previously developed by Cole. They are shown in the figures that are presented below, which are inspired by Potito (1980, pp. 26–27) (Fig. 3.7). Thus, the reporting configurations followed a more sophisticated and rational procedure to the extent that the variations were not simply made between two asset

3.4 The Next Phase of Finney’s Work

29

Fig. 3.4 Solution proposed by Finney to the question of AIA (Exhibit A—part 3). Source: Kempner (1956, pp. 234–238)

30

3 The Historical Background of Cash Flow Statement: First Evidences and. . .

Fig. 3.5 Solution proposed by Finney to the question of AIA (Exhibit B). Source: Kempner (1956, pp. 234–238)

3.4 The Next Phase of Finney’s Work

31

Fig. 3.6 Solution proposed by Finney to the question of AIA (Exhibit C). Source: Kempner (1956, pp. 234–238)

32

3 The Historical Background of Cash Flow Statement: First Evidences and. . .

Fig. 3.7 Statement of funds. Source: Kester (1933)

3.4 The Next Phase of Finney’s Work

Fig. 3.7 (continued)

33

34

3 The Historical Background of Cash Flow Statement: First Evidences and. . .

values, but each item was broken down into positive and negative components, thereby increasing the degree of detail. These were the years that some authors used to conceive the “Funds” as liquid assets or assets that were convertible into cash in the short term that represented components of working capital. Dickerson and Jones (1931) emphasized the importance of understanding, next to the net result for the year, the changes in funds with movements in the cash account and indicated a statement whose final balance was “net decrease in the cash balance.” Moonitz (1943) raised some criticisms considering that the analysis of funds should concern monetary movements, thereby allowing the possibility that the meaning of “Funds” could refer to liquid values or be extended to other components such as short-term credits, which are highly liquid securities excluding inventories. Scovill (1944) argued that the term “funds” meant liquid components. Collins (1946) provided some insights into the analysis of changes in short-term provisions, i.e., the analysis of net working capital.

*** In those years, the Cash Flow Statement was a widespread document although there were few companies that published it regularly. For example, Kempner (1956, p. 113) performed an analysis of 100 large companies and found that only six companies presented it in 1945 and 31 companies presented it in 1954. Additionally, in 1956, Horngren (1956) provided a study on the use of the Statement of Changes in Asset Funds for data analysis purposes, addressing this contribution to financial analysts. Gustafson (1963) provided some operational guidelines for the preparation of the Cash Flow Statement. Gynther (1968) analyzed the importance of the Statement of Cash Flows as a tool for measuring the prospective growth and development paths of companies (Anton 1962; Jaediche and Sprouse 1965; Roberts and Gabhart 1972). In the 1970s, the dissemination of the report became more common in the USA, and it began to be disseminated in Britain, together with the need for certification of the document itself. In 1971, American auditors published a manual entitled “Short FormReport,” which contained the certification for the Cash Flow Statement (Sellie 1943; Steyn and Hamman 2003; Stolowy and Walser-Prochazka 1992; Trout et al. 1993; Wallace et al. 1997, 1999).

References Anton HR (1962) Accounting for the flow of funds. Houghton Mifflin, Boston Bliss JH (1923) Financial and operating ratios in management. Ronald Press, New York Cole WM (1908) Accounts, their construction and interpretation, for businessmen and students of affairs. Houghton Mifflin, Boston Collins GW (1946) Analysis of working capital. Account Rev 21(4):430–441

References

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Dickerson WE, Jones JW (1931) Some observations on the statement of application of funds. Account Rev:277–281 Esquerre PJ (1914) The applied theory of accounts. Ronald Press, New York Esquerre PJ (1925) Resources and their application. J Account 39:424 Finney HA (1923) The statement of application of funds. J Account:49–62 Gilman S (1925) Analysing financial statements. Ronald Press, New York Greene TL (1897) Corporate finance. G. P. Putnam’s Sons, New York Gregory HE (1928) Accounting reports in business management: use of financial and operating statements, together with a system of standards and performance records in maintaining efficient management and control. Ronald Press, New York Gustafson GA (1963) Working paper for preparation of cash-flow statement. Account Rev 38 (1):160 Guthmann HG (1950) The movement of debt to institutions and its implications for the interest rate. J Financ 5(1):70–87 Gynther MM (1968) Future growth aspects of the cash flow computation. Account Rev 43 (4):706–718 Hatfield HR (1927) Accounting. Appleton and Co., Texas Horngren CT (1956) The funds statement and its use by analyst. J Account 101:55–59 Jaediche RK, Sprouse RT (1965) Accounting flow: income, funds and cash. Prentice Hall, Englewood Cliffs Kafer K, Zimmerman VK (1967) Notes on the evolution of sources and applications of funds. Int J Account 2(2):89–121 Kempner JJ (1956) The statement of application of funds in modern corporate accounting practice. The Ohio State University, Columbus, OH Kester RB (1933) Advanced accounting, 3rd edn. Ronald Press, New York Kohler EL, Morrison PL (1931) Principles of accounting. McGraw-Hill Book, New York Mechelli A (2008) Il rendiconto finanziario consolidato. Profili teorici e comportamenti aziendali. Cedam, Padova Moonitz M (1943) Inventories and the statement of funds. Account Rev 18(3):262–266 Paton WA (1922) Accounting theory. Ronald Press, New York Paton WA (1941) Advances accounting. Macmillan, New York Paton WA, Stevenson RA (1922) Principles of accounting. Macmillan, New York Potito L (1980) Il Rendiconto Finanziario nelle imprese. Giannini Editore, Napoli Roberts A.C.-Gabhart D.R.L. Statement of funds: a glimpse of the future? J Account, 1972 133, 54 Rosen LS, DeCoster DT (1969) “Funds” statements: a historical perspective. Account Rev 44 (1):124–136 Scovill HT (1944) Application of funds made practical. Account Rev 19(1):20–31 Sellie CN (1943) Fund statement terminology. Account Rev XVIII:160 Steyn BW, Hamman WD (2003) Revamping the cash flow statement. Account Res 11:181–198 Stolowy H, Walser-Prochazka S (1992) The American influence in accounting: myth or reality? The statement of cash flows example. Int J Account 27(3):185–221 Trout K, Tanner M, Nicholas L (1993) On track with direct cash flow. Manag Account 75(1):23–28 Wallace RSO, Choudhury SIM, Pendlebury M (1997) Cash flow statements: an international comparison of regulatory positions. Int J Account 32(1):1 Wallace RSO, Choudhury SIM, Adhikari A (1999) The comprehensiveness of cash flow reporting in the United Kingdom: some characteristics and firm-specific determinants. Int J Account 34 (3):311

Chapter 4

The Value Relevance of Accounting Information and Cash Flows: A Review of Prior Studies and Models

4.1

The Concept of Value Relevance

The contributions of “value relevance” can be collected from macro-area of earnings quality studies, i.e., those studies aimed at appreciating the quality and usefulness of financial statements and related accounting information. In the numerous works on “value relevance,” there is a clear definition of the concept of “value relevance,” but there are several definitions that frame “value relevance” as a tool for measuring the significance, quality, and reliability of economic and financial information. The first contributions on the subject of “value relevance” refer to the 1960s, and all are motivated by the need to analyze the relationship between market values and financial statement values. In 1968, Ball and Brown (1968) and Beaver (1968) published studies that focused on the reactions of market prices to operating income and monitoring how these performances influenced investors’ choices. These three authors are still considered to be the pioneers of accounting in studies on the ability of accounting data to influence capital markets, which are the basis for the scientific studies on “Capital Market Research in Accounting.” The authors have defined the balance sheet income as “value relevant” to the extent that there is a relationship between income and market values, based on a short-term event study. However, there are other studies that are always in the context of “value relevance” that are opposed to the former because they analyze this behavior over a longer term, ranging from 1 to 5 years (“long-term event studies”). Investors’ choices are placed within the “Normative Accounting theory,” a discipline that aims to verify investors’ choices based on their objectives and studying their behavior without any measurements that are based on empirical surveys.

© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9_4

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4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

In the second half of the 1980s, Watts and Zimmerrman (1986) introduced a new line of studies, the “Positive Accounting theory,” which has been one of the largest incubators of economic–financial research at the University of Chicago. This strand aims to understand if and how accounting practices can be used in the best possible way. Contributions of significant importance were by Ohlson (1989) and Feltham and Ohlson (1995), who associated financial reporting with the concept of value. Ohlson is considered to be the pioneer of “value relevance” and “Capital Market Research in Accounting.” Ohlson’s study is based on the relationship between the market value of companies and the major accounting variables (operating income and equity). Barth et al. (1999) measured the impact that income has on investors by comparing cash flows from operating activities and flows from non-monetary components (accruals). The results show that both monetary flows and accruals are “value relevant,” with the distinction that the monetary component represents an incremental element, while the non-monetary component is perceived negatively by investors. Barth et al. (2005) proposed a breakdown of non-monetary components to measure the negative relationship between market prices and accruals to see if investors are always negatively affected. Several studies showed that the non-monetary components (change in operating receivables and inventories) negatively affected market prices. Conversely, changes in trade payables and depreciation and amortization with market prices were not significant. Mason (2004) used the Ohlson model (1989) to separate the operating component from the financial component and analyzed how the principle of prudence (conservatism) had an effect on the value relevance of both cash flows and non-monetary components. According to Mason, the latter was determined by the most significant investors for companies that preferred the principle of prudence. Marquard and Wiederman (2004) analyzed the impact of profit management on value relevance. Aboody and Lev (1998) examined the effect of research and development (R&D) investments on value relevance within the software industry by comparing the different accounting principles that allowed R&D costs to be capitalized or expensed in the income statement. The results showed that the accounting principles that allowed capitalization of such costs were considered to be relevant by investors, unlike the values that were expensed annually in the profit and loss account. Collins (1997) also used the Ohlson model to determine value relevance, considering income and equity as variables over a medium to long-term time horizon. Collins showed that the explanatory value of income decreases, while the explanatory value of equity increases and the combined explanatory value also increases. Lev and Zarowin (1999) argued that the “value relevance” of operating income, cash flows, and shareholders’ equity had decreased over time, mainly because of the emergence of intangible assets.

4.1 The Concept of Value Relevance

39

The results of the study proposed by Dontoh et al. (2004) showed that, over time, the volatility of market returns has caused a reduction in “value relevance,” highlighting how financial speculation tends to compress “value relevance,” reducing the importance of economic and financial reporting. Other studies indicated that investors were interested not only in accounting and financial data (income, assets, and flows) but also in other information that was contained in the notes to the financial statements. With the introduction of IAS/IFRS, there have been numerous contributions on the subject of “value relevance,” all with the aim of quantifying the change in “value relevance” in view of the transition to the new international accounting standards (Cordazzo 2008; Devalle 2008; Pavan and Paglietti 2011; Azzali et al. 2012) and verifying whether the transition to IAS/IFRS has produced better information for investors in the decision-making process. Francis and Schipper (1999) provided the following four interpretations of the concept of value relevance: 1. The information contained in the financial statements has an impact on the share prices of listed companies, which should reflect all available information. Based on this interpretation, the “value relevance” is part of the association between the book values and the market value of the listed company. 2. The ability of accounting data to provide the most comprehensive information possible to investors on cash flows, future income, dividends, and prices. These interpretations are very similar because “value relevance” is tested through statistical models that link accounting information and market value through share prices. 3. The statistical report becomes a proxy for understanding whether investors use the information in the financial statements to establish prices. In this perspective, the “value-relevant” information, having an influence on investors’ expectations, has the ability to change share prices. This interpretation is, therefore, associated with the timeliness and expectations of accounting information. 4. In the fourth and final interpretation, “value relevance” is the result of the ability of accounting information to summarize the data and information (regardless of source) that affect the performance of the shares. Francis and Schipper (1999) test the relevance of financial statement information and come to the conclusion that this information is not the only significant information. If the relationship between financial statement information and market value is not significant, then this information is not “value relevant.” Barth et al. (2001) proposed the following definition of “value relevance”: “the association between accounting amounts and equity market values” (p. 95). This definition highlights that value relevance is a tool to quantify the relationship between accounting amounts and market value.

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4.2

4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

The Value Relevance, the Efficiency of the Market and the Transparency

It is generally accepted that value relevance is associated with market efficiency. To define efficient capital markets, Copeland et al. (2004) considered the following four essential conditions: 1. Markets are “without difficulty” (i.e., without transaction costs, taxes, or any kind of regulation, all goods are divisible and marketable). 2. There is perfect competition (all market participants are price takers). 3. The markets are information-efficient (e.g., information is free of charge and received simultaneously by all market participants). 4. All market participants are rational and maximize their expected utility. In an efficient capital market, prices reflect fully and instantaneously all available and relevant information (Malkiel and Fama 1970). Therefore, the above four conditions are not always found: markets may enjoy imperfect competition, information is sometimes distorted or expensive, and investor irrationality (e.g., overconfidence, underestimation of values, speculative bubbles) is quite common. What is the link between value relevance and market efficiency? Generally, value relevance research should only assume that share prices reflect the consensus of market investors. This definition does not substantially require market efficiency. Barth et al. (2001) state that value relevance research need not assume that stock market values are real or an impartial measure of the undetectable intrinsic value of the company’s assets. With the further assumption of market efficiency, at least in its intermediate form, the resulting inference refers to the extent to which the accounting information in question reflects the true underlying value. The model used in the study is based on the measurement error. Assuming market efficiency, the stock market values are set as a benchmark and labelled as “true.” Thus, the resulting multiples that symbolize accounting information are measured with the error compared to benchmarking. Multiples with the smallest measurement error are those with the highest valuation accuracy, and vice versa. Consequently, a small measurement error is associated with high performance.

4.3

The Main Models to Assess the Value Relevance

Value relevance in accounting studies has been the subject of much research over the last 50 years (Mechelli 2013). Such research has used increasingly sophisticated empirical–statistical methodologies that, in most cases, are based on regressions that assume values that are derived from the market and are independent variables (explanatory variables) that are contained in the financial statements. In this chapter, the main statistical models that are used for analyzing/testing value relevance are divided into two large families and reviewed:

4.3 The Main Models to Assess the Value Relevance

41

1. Price models, which investigate the existence of a potential relationship between stock prices and one or more balance sheet values. 2. Return models, which test the existence of a potential relationship between returns (or stock price changes) and one or more values contained in the financial statements. The first (Price models) are based on Ohlson’s (1989) model that is shown below, which allows the accounting quantities to be related to the price (or market value) of listed companies with the aim of estimating a potential relationship between accounting values and market values. In Price models, the market value is indicated by the share price or market capitalization, if the independent variables are expressed in absolute value or “per share,” respectively. Francis and Schipper (1999) define such models as an explanatory power approach based on the ability of accounting quantities to explain market values.

4.3.1

The Price Models: The Ohlson Model (1989)

Value relevance studies have seen a significant development following the development of the Ohlson model (1989), and their objective is precisely to assess the relevance of a book value for the purposes of determining market value (Biagioni et al. 2015; Veltri and Silvestri 2011; Mechelli 2013). The origin of the model can be traced back to the 1995 scientific contribution that was published by the journal Contemporary Accounting Research, although the content of this study had spread among the scientific community in a 1989 project, which then went on to influence the model on yields that was proposed by Easton and Harris (1991). Ohlson model is, for all intents and purposes, the founding model of the “value relevance” studies, and it was the subject of several elaborations in the following years and became of fundamental importance because it made it possible to measure the effect of the main accounting summary quantities (income and net equity) on market value. Within this model, and in its subsequent elaborations, the market value is a function both of the fundamental components (book value or book value of shareholders’ equity, or “equity,” and net income) and of an additional component that has the purpose of containing all other information that is capable of influencing the real value of the company. Ohlson’s contribution to value relevance studies is appreciable to the extent that he has developed a valuation model that estimates the value of the company through a weighted average of assets and liabilities and income. This methodology can be traced back to an evolved version of the mixed asset–income valuation model in which the inputs are the summary values of the two financial statements. The assumptions of the model are as follows:

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4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

1. The value of the company is the result of the present value of the prospective dividends. 2. The preparation of the financial statements meets the “clean surplus relation,” i.e., the income for the year is equal to the change in shareholders’ equity from one period to the next and the net of the dividends and capital increase/repayments. The clean surplus relation assumes that shareholders’ equity changes are based on net income earned and dividends distributed. 3. Abnormal returns follow a linear-autonomous process. The anomalous return for a period depends, in full or in part, on the value of the same return in the previous year. Feltham and Ohlson (1995) proposed the same model that distinguishes between operating and financial figures, and it explicitly considers the role of conservatism in estimating net assets and operating income. Once Ohlson’s proposal had been analyzed, to arrive at a valuation estimate of the economic capital that is capable of reconciling equity and income variables, the following objectives are proposed in this paragraph: (a) Define which regressions that are formulated by scholars recall Ohlson model. (b) Avoid misunderstandings about the process of identifying the variables that are to be included in the evaluation model. (c) Analyze the differences between Ohlson model and the regressions that were previously indicated. The regression used that was based on the Ohlson model is shown below: MV it ¼ /0 þ /1 BV it þ /2 NI it þ uit where MVit represents the market value of the company i at the time t BVit represents the book value of the net assets of the company i at time t NIit represents the book value of the net income of the company i at time t uit represents the error term The above formula is sometimes proposed by dividing all variables by the number of outstanding shares with the aim of limiting the problems that are related to the size variability of the companies in the sample, as follows: Pit ¼ β0 þ β1 BVPSit þ β2 NIPSit þ εit where Pit is the price of each individual share of the company i at time t BVPSit is the equity per share of the company i at time t NIPSit is the net income per share of the company i at time t εit is the error term

4.3 The Main Models to Assess the Value Relevance

43

To avoid possible misunderstandings, the first consideration to be made is the type of values that are included in the Ohlson model. Because this model can be seen as a weighted arithmetic mean between an asset model and an income model, it should not lead to the simplistic conclusion that the averaged values are those obtained by evaluating the company using the asset and income method, respectively. The capital method, as is well known, is essentially based on the re-expression of shareholders’ equity to current values, adding, for complex capital methods, the value of intangible assets that is not recorded in the balance sheet. The value of equity included in the regressions, and to which Ohlson refers in the development of its model, is the book value of the shareholders’ equity, the amount of which is a direct consequence of the valuations that are used to draw up the financial statements. These valuations normally lead to asset values that are different from those taken as a reference for the valuation of the company using the equity method. This, for various reasons, includes the widespread use of historical cost instead of fair value when preparing the financial statements and the absence, from the same financial statements, of many intangible assets, which, while not having the characteristics that are required to be recorded on the balance sheet, often represent a strategic resource that significantly affects the value of the company. Similarly, the operating income included in the Ohlson model is not the result that is used when evaluating the economic capital of the company using the income method. The income to which Ohlson refers is that which emerges from the financial statements (estimated in accordance with the clean surplus relation), while the income used for the application of the income method is the result of a normalization process, which should lead to a representative value of the result that the company is, on average, able to produce in the coming years under normal operating conditions. Thus, Ohlson model is the result of a scientifically rigorous reasoning that provides theoretical justification for research into the value relevance of financial statement values.

4.3.2

The Return Models: The Model of Easton and Harris (1991)

The second category of methods, the return models, aims to measure the relationship between a change in stock market prices and balance sheet values. These models are based on the elaboration of Easton and Harris (1991), who devised a theory of “value relevance” based on the following two valuation approaches: book value valuation model and earning valuation model. The first establishes that the share price of a listed company is the result of two components: the equity value per share of the company i at time t (first component) and the differential between the share price and book values (second component). The formulation is as follows:

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4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

Pit ¼ Bit þ uit where Pit is the share price of the company i at time t Bit is the book value of the shareholders’ equity of the company i at time t uit is (Pit  Bit), which is the difference between price and book value of the assets The second approach, which is based on the earnings valuation model, indicates that the price of the shares is a function of the income for the year, as shown below: Pit ¼ E it where Pit is the share price of the company i at time t Eit is the book value of the net income (earnings) of the company i at time t Return models are different from price models because they do not analyze whether or not there is a relationship between market values and book values. However, their purpose is to determine the relationship between a change in price or yield that is associated with a change in book values. The characteristic that these models assume is that they consider the company’s performance rather than the market value. There are other models that are mainly used for “incremental association studies” (the balance sheet models), which are defined by Holthausen and Watts (2001, p. 53), in which the market value of the company is a function of the algebraic sum of assets minus the value of liabilities.

***

It should be reiterated that there is always a tendency to omit the variable “other information,” which indicates the non-accounting information that has the function of incorporating all the elements that cannot be entered on the balance sheet, i.e., those that have no place. The reason for excluding this component can be found in the problems of quantification of the component. Dechow, Hutton, and Sloan (1999) argue that inclusion of the variable relating to non-accounting information reduces measurement errors, albeit to a minimum. Other scholars such as Kothari and Zimmerman (1995) attempt to exclude the non-accounting component by stating that this component will be identified by the error term and the intercept in the regression model. Ohlson (1989) argues, however, that the non-accounting component will incorporate the information in subsequent years because such information is not present in current balance sheet items. To measure these components, it is necessary to estimate the impact they have in investors’ forecasts on future returns.

4.4 The Value Relevance in the Literature of Accounting

4.4

45

The Value Relevance in the Literature of Accounting

The value relevance of accounting information has been highly debated among scholars. A number accounting is “value relevant” if the figure is strongly related to equity market values (Ohlson 1989; Barth et al. 2001; Holthausen and Watts 2001; Vishnani and Shah 2008). According to Barth et al. (2001), “. . .an accounting amount is defined as value relevant if it has a predicted association with equity market values” (Barth et al. 2001, p. 79). Accounting information may have positive effects on the value relevance because it reduces information asymmetry and agency costs (McNichols and Stubben 2008; Biddle et al. 2009) and because managers learn new information from their own disclosures and the disclosures of their peers (Minnis and Shroff 2017). Easton (1999) and Beaver (2002) showed that the value relevance research plays an important role in providing empirical evidence on accounting numbers that are associated with the predicted value of the securities market. Reliable information is critical to make capital markets more efficient for increasing the incentive to invest in the stock market and facilitating optimal allocation of savings to investment (Agostino et al. 2011). Crucially, many scholars have studied accounting information and its relevance (Ball and Brown 1968; Beaver 1968; Harris et al. 1994; Hung 2000; Brimble and Hodgson 2007; Barth et al. 2008). The concept of value relevance for financial information was used by Amir and Lev (1996) to show how the information from financial statements influences the investors’ decisions (Morais and Curto 2008). Value relevance is commonly used to quantify of how well accounting information reflects the firm’s real value (Barth et al. 2008) and implies the ability of the financial information contained in the financial statements to explain the stock market measures. Financial information has been viewed as increasingly relevant to stakeholders, as long as it can establish a better correlation with the information that is transmitted to the financial market as the share price (Filip and Raffournier 2010). The value relevance of financial information has been especially investigated through the analysis of companies’ data on the stock exchanges throughout the world (Barth et al. 2008; Muller et al. 2011; Filip and Raffournier 2010). A value-relevant variable is the data or amount in the financial statement that guides investors in their pricing of shares. Investment decisions, therefore, center on the association between stock returns or share price and accounting-related information such as earnings, cash flows, book value of equity, and firm’s size. Most studies compare the value relevance using Ohlson’s (1989) model with consequent refinements, which indicates the value as a linear function of the book value of equity and the current value of profits.

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4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

4.5

Theoretical Foundation

As mentioned above value relevance consists of an evaluation relationship between accounting information and capital market values. Most of scholars found its theoretical foundation in microeconomics (Malkiel and Fama 1970) containing the assumption of market efficiency which regards to the idea that market is efficient if prices fully reflect all information (Dickman and Morse 1986; Malkiel and Fama 1970). Market efficiency can be described in terms of changes in security prices react to new information: security prices are influenced by the information disclosure, suggesting the importance to disclose information to investors (Strom 2006). On the other hand, Beaver (2002) states that theoretical background of value relevance studies used a combination approach of a valuation theory together with contextual accounting and financial reporting (accounting theory) that allow scholars to assess how accounting measures and other information relate to market value. In relation to accounting theory, Barth et al. (2001) argued that a number in financial statements can only be associated with equity values and these numbers contain information that is of relevance when assessing a firm’s market value. Some theories that explained the foundations of value relevance studies are synthetized in the next sections.

4.5.1

The Valuation Theory

According to Brown (1995), business valuation is an economic issue, with evaluation models that require benchmarking to be reliable. The theoretical background of valuation moves to the concept of price and its crucial role within the market. Parker (2006) argued that the aim of a valuation is to determine the price at which it is expected a property might change hands in the open market. The theory must seek to reflect how sellers and buyers in the market could appreciate the value of that property to them. Valuation theory can be viewed as subset of finance theory. Finance theory approaches valuation as a question of worth through such approaches as capitalization and the capital asset pricing model (CAPM). Finally, according to the valuation theory, the value of a stock is equal to the present value of future net dividends (Francis and Schipper 1999). Nilsson and Kand (2003) stated that most of the value-relevant research adopted the valuation approach through the Ohlson model (1989) and its subsequent refinements. Holthausen and Watts (2001) showed that value relevance use two different sub-theories of valuation: • The direct valuation theory (DVT). It proposes an association between accounting earnings and stock market value. In direct valuation theory, accounting earnings is intended to be combined with the equity market value levels. According to this, standard setters should be interested in the results of a study of the association’s

4.5 Theoretical Foundation

47

stock price related to alternative accounting earnings or book value of equity measures (Holthausen and Watts 2001). • Inputs-to-equity valuation theory (ITEVT). It proposes the association between accounting numbers and a variable used in the valuation model. In the ITEVT, the role of accounting is to provide information on inputs to valuation models that investors use to evaluate equity firms.

4.5.2

The Theory of Value Relevance

Goodwin et al. (2003) stated that value relevance is based on the empirical evidence in the theory of market efficiency hypothesis by which prices reflect information. Theory of value relevance represents the relationship between the information impounded in the accounts and the information impounded by the market. This theory is based on three different assumptions: • It assumed that market are efficient, usually a semi-strong efficient. • It assumed that value of current market price is determined by accounting information. • It assumed that over infinite horizon, economic goodwill measured by the difference between the market value of equity and the book value converges to zero. The theory exposited is a theory of information transmission, first to the accounts and then to the markets (Goodwin et al. 2003).

4.5.3

The Clean Surplus Theory

The literature defines CST as an accounting identity where income of the period is equal to net dividends plus the change in book value of equity (Brief and Peasnell 1996). Therefore, all revenues, expenses, gains, and losses must flow through the income statement, ensuring a clean surplus. If these flows of economic resources are not included in the income statement, then changes in equity (plus dividend payouts) will not be equal to the sum of income in each period. This will entail dirty surplus accounting where the total income over the life of the firm will not equal to net cash flows. In conclusion, the CST argued that both income statement and balance sheet variables can lead to the firm’s market value. There is coherent conception of measurement of accounting variables to explain market variables.

4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

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Direct Valuaon Theory Valuaon Theory Inputs-to-equity Valuaon Theory VALUE RELEVANCE Framework

Value Relevance Theory

Clean Surplus Theory Decision Usefulness Paradigm

Fig. 4.1 Summarizing the theoretical foundation of studies on value relevance

4.5.4

The Decision Usefulness Paradigm

Most accounting standards are based on decision usefulness: accounting standards should provide useful information to users on the economic consequences of decisions. The DUP appeared for the first time in USA in the 1970s and represented a relevant change in attitude toward accounting purposes. APB Statement No. 4 (p. 73) was the first formal document to set decision usefulness objective addressing the more traditional accountability: The basic purpose of financial accounting and financial statements is to provide quantitative financial information about a business enterprise that is useful to statement users, particularly owners and creditors, in making economic decisions.

The DUP is based on a context of markets and assumes that resources will be allocated more efficiently when rational economic decisions are facilitated (David et al. 2001). The main users are those who make decisions having an impact of firm’s value, specifically the decision-making by capital market users (Beaver 2002; Belkaoui 2000). Accounting information is value relevant if the information can influence decisions made by decision makers (Fig. 4.1) (Belkaoui 2000).

4.6

How Cash Flows Explain the Value Relevance

Several contributions have addressed the relative association of cash flows and earnings with security returns. Ball and Brown (1968) and Beaver and Dukes (1972) found that the association between security returns and earnings is higher

4.6 How Cash Flows Explain the Value Relevance

49

than that between security returns and operating cash flows, where the definition of operating cash flow is net income plus depreciation, depletion, and amortization. Some years later, Patell and Kaplan (1977) elaborated their analysis on cash flow based on the working capital from operations and attempted to control for earnings and test for the incremental information provided by operating cash flow. Beaver, Griffin, and Landsman set a cross-sectional regression with raw returns as the dependent variable and cash flow and earnings as independent variables. In a pooled regression of observations for 1977 and 1978, the coefficient of the cash flow variable is significant and adds explanatory power to the earnings variable. Other evidence for the relationship between measures of cash flow and earnings is offered by Gombola and Ketz (1983). They set a factor analysis to group various financial ratios, and they found that cash flow is relevant. In particular, cash flow ratios are highly associated with earnings-based return ratios. Wilson (1986) found the incremental information content for accruals over cash flow for 1981–1982. According to Freeman and Tse (1992) and Dimitropoulos et al. (2010), investors are searching for alternative measures, other than earnings, to assess performance, and cash flow represents a crucial determinant. Moreover, operating cash flows (OCFs) are the inflows and outflows of cash related to the main operating operations. Cash inflows are different from revenues because of the unearned and the credit portions, while the cash outflows are different from expenses resulting from prepaid and accrual expenses. Previous studies (Kwon etal. 2009; Penman and Sougiannis 1998; Barth et al. 2001; Sloan 1996; Dechow et al. 1999; Charitou et al. 2000) confirmed the value relevance of the information content of both OCF and accruals in the interpretation of market price movements, as well as earnings. Wilson (1986) demonstrates that cash flows and total accruals, taken together, have an incremental information content beyond earnings and that the total accruals have incremental information content beyond the cash flows (Kwon et al. 2009). Bowen and Burgstahler (1986, 1987) argue that cash flow has an incremental information content relative and in addition to that of earnings. Cheng et al. (1997) also report that operating cash flows have incremental value relevance beyond earnings. Other studies document that cash flows are more value relevant than accrual earnings in predicting future cash flows because of conservative accounting effects (Wilson 1986; Bowen and Burgstahler 1986, 1987; Cheng et al. 1997; Barth et al. 1999). Kumar and Krishnan (2008) investigated the role of investment opportunities as a determinant of the relative importance of cash flows from operations and accruals in firm valuation. They found that at low investment opportunity levels, cash flow value relevance increases with investment opportunities.

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4 The Value Relevance of Accounting Information and Cash Flows: A Review of Prior. . .

References Aboody D, Lev B (1998) The value-relevance of intangibles: the case of software capitalization. J Account Res 36:161–191 Agostino M, Drago D, Silipo DB (2011) The value relevance of IFRS in the European banking industry. Rev Quant Finan Acc 36:437 Amir E, Lev B (1996) Value-relevance of nonfinancial information: the wireless communications industry. J Account Econ 22(1–3):3–30 Azzali S, Fornaciari L, Pesci C (2012) Reddito d’impresa e Value Relevance per gli investitori. Economia Aziendale 3(1):1–19 Ball R, Brown P (1968) An empirical evaluation of accounting income numbers. J Account Res 6 (2):159–178 Barth ME, Beaver WH, Hand JR, Landsman WR (1999) Accruals, cash flows, and equity values. Rev Acc Stud 4(3–4):205–229 Barth ME, Beaver WH, Landsman WR (2001) The relevance of the value relevance literature for financial accounting standard setting: another view. J Account Econ 31(1–3):77–104 Barth M, Beaver WH, Hand JRM, Landsman WR (2005) Accruals accounting based valuation models and the predictions of equity values. J Acc Audit Financ 20:311–345 Barth ME, Hodder LD, Stubben SR (2008) Fair value accounting for liabilities and own credit risk. Account Rev 83(3):629–664 Beaver WH (1968) The information content of annual earnings announcement: empirical research in accounting selected studies. J Account Res 6:67–92 Beaver WH (2002) Perspectives on recent capital market research. Account Rev 77(2):453–474 Beaver WH, Dukes RE (1972) Interperiod tax allocation, earnings expectations, and the behavior of security prices. Account Rev 47(2):320–332 Belkaoui AR (2000) Accounting theory. Thompson Learning Biagioni R, Liberatore G, Mazzi F (2015) Value relevance of research and development in Italy (La Value Relevance Delle Spese Di Ricerca E Sviluppo in Italia). Rivista Dottori Commercialisti:96–112 Biddle GC, Hilary G, Verdi RS (2009) How does financial reporting quality relate to investment efficiency? J Account Econ 48(2–3):112–131 Bowen RM, Burgstahler D, Daley LA (1986) Evidence on the relationships between earnings and various measures of cash flow. Account Rev:713–725 Bowen RM, Burgstahler D, Daley LA (1987) The incremental information content of accrual versus cash flows. Account Rev:723–747 Brief R, Peasnell K (1996) Clean surplus: a link between accounting and finance. Garland Publishing Brimble M, Hodgson A (2007) On the intertemporal value relevance of conventional financial accounting in Australia. Account Financ 47(4):599–622 Brown G (1995) Comment. J Prop Valuat Invest 13(1):3–4 Charitou A, Clubb C, Andreou A (2000) The value relevance of earnings and cash flows: empirical evidence for Japan. J Int Financ Manag Acc 11(1):1–22 Cheng CA, Chao-Shin L, Schaefer TF (1997) The value-relevance of SFAS no. 95 cash flows from operations as assessed by security market effects. Account Horiz 11(3):1 Collins DW, Maydew EL, Weiss IS (1997) Changes in the value-relevance of earnings and book values over the past forty years. J Account Econ 24(1):39–67 Copeland T, Weston JF, Shastri K (2004) Financial theory and corporate policy, 4th edn. AddisonWesley, Boston, MA, p 354 Cordazzo M (2008) The value-relevance of disclosure on intangible assets, working paper, Free University of Bozen, forthcoming David C, Mary F, Teresa G (2001) Public accountability: a new paradigm for college and university annual reports. Crit Perspect Account 12:1–31

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Dechow PM, Hutton AP, Sloan RG (1999) An empirical assessment of the residual income valuation model. J Account Econ 26(1–3):1–34 Devalle A (2008) The impact of the gains and losses recognised directly in equity on the company profitability. Economia Aziendale 1:25. www.ea2000.it Dimitropoulos PE, Asteriou D, Koumanakos E (2010) The relevance of earnings and cash flows in a heavily regulated industry: evidence from the Greek banking sector. Adv Account 26 (2):290–303 Dontoh A, Radhakrishnan S, Ronen J (2004) The declining value relevance of accounting information and non-information-based trading: an empirical analysis. Contemp Account Res 21(4):795–812 Dyckman T, Morse DC (1986) Efficient capital markets: a critical analysis. Prentice-Hall, Englewood Cliffs, NJ Easton PD (1999) Security returns and the value relevance of accounting data. Account Horiz 13 (4):399–412 Easton PD, Harris TS (1991) Earnings as an explanatory variable for returns. J Account Res 29 (1):19–36 Feltham GA, Ohlson JA (1995) Valuation and clean surplus accounting for operating and financial activities. Contemp Account Res 11(2):689–731 Filip A, Raffournier B (2010) The value relevance of earnings in a transition economy: the case of Romania. Int J Account 45(1):77–103 Francis J, Schipper K (1999) Have financial statements lost their relevance? J Account Res 37 (2):319–352 Freeman RN, Tse SY (1992) A nonlinear model of security price responses to unexpected earnings. J Account Res 30(2):185–209 Gombola MJ, Ketz JE (1983) A note on cash flow and classification patterns of financial ratios. Account Rev:105–114 Goodwin J, Sawyer KR, Ahmen K (2003) Value relevance and information heterogeneity. Working paper, La Trobe University Harris TS, Lang M, Mőller HP (1994) The value relevance of German accounting measures: an empirical analysis. J Account Res 32(2):187–209 Holthausen RW, Watts RL (2001) The relevance of the value-relevance literature for financial accounting standard setting. J Account Econ 31(1–3):3–75 Hung M (2000) Accounting standards and value relevance of financial statements: an international analysis. J Account Econ 30(3):401–420 Kothari SP, Zimmerman JL (1995) Price and return models. J Account Econ 20(2):155–192 Kumar KR, Krishnan GV (2008) The value-relevance of cash flows and accruals: the role of investment opportunities. Account Rev 83(4):997–1040 Kwon YK, Newman P, Zang Y (2009) The effects of accounting report quality on the bias in and likelihood of management disclosures. Available at SSRN 1399863 Lev B, Zarowin P (1999) The boundaries of financial reporting and how to extend them. J Account Res 37(2):353–385 Malkiel BG, Fama EF (1970) Efficient capital markets: a review of theory and empirical work. J Financ 25(2):383–417 Marquardt CA, Wiederman CI (2004) The effect of earnings management on the value relevance of accounting information. J Bus Financ Account 31:297–332 Mason L (2004) The impact of accounting conservatism on the magnitude of the differential information content of cash flows and accruals. J Account Audit Financ 19:249–282 McNichols MF, Stubben SR (2008) Does earnings management affect firms’ investment decisions? Account Rev 83(6):1571–1603 Mechelli A (2013) La Value Relevance del bilancio di esercizio: Modelli, metodologie di ricerca ed evidenze empiriche (vol 15). G Giappichelli Editore Minnis M, Shroff N (2017) Why regulate private firm disclosure and auditing? Account Bus Res 47 (5):473–502

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Morais AI, Curto JD (2008) Accounting quality and the adoption of IASB standards: Portuguese evidence. Revista Contabilidade & Finanças 19(48):103–111 Muller KA III, Riedl EJ, Sellhorn T (2011) Mandatory fair value accounting and information asymmetry: evidence from the European real estate industry. Manag Sci 57(6):1138–1153 Nilsson H, Kand F (2003) Essays on the value relevance of financial statement information. Department of Business Administration, UMEA Universiteit Ohlson J (1989) Accounting earnings, book value and dividends: the theory of clean surplus equation, Working paper, Columbia University Parker D (2006) Towards a coherent theory of valuation. Pac Rim Prop Res J 12(4):426 Patell J, Kaplan R (1977 August) The information content of cash flow data relative to annual earnings: preliminary tests. Working paper, Stanford University Pavan AE, Paglietti P (2011) La value relevance dell’informativa di bilancio: dai principi contabili italiani agli standard contabili internazionali, Rivista Italiana di Ragioneria e di Economia Aziendale. Rirea, Roma Penman SH, Sougiannis T (1998) A comparison of dividend, cash flow, and earnings approaches to equity valuation. Contemp Account Res 15(3):343–383 Sloan RG (1996) Do stock prices fully reflect information in accruals and cash flows about future earnings? Account Rev:289–315 Strom N (2006) Essays on information disclosure: content, consequence and relevance. Department of Business Studies, Uppsala Veltri S, Silvestri A (2011) La value relevance dei valori contabili dopo la crisi finanziaria: un’applicazione al mercato italiano, Rivista Italiana di Ragioneria e di Economia Aziendale 3 Vishnani S, Shah BK (2008) Value relevance of published financial statements–with special emphasis on impact of cash flow reporting. Int Res J Financ Econ 17(1):84–90 Watts RL, Zimmerman L (1986) Positive accounting theory. Prentice Hall, Englewood Cliffs, NY Wilson G (1986) The relative incremental information content of accruals and cash flows: combined evidence at the earnings announcement and annual report date. J Account Res 24:165–200

Chapter 5

Data Analysis on EU and US Listed Companies

5.1

Hypothesis Development

Companies prepare Cash Flow Statements according to the accounting standards requirements. A broad discussion has been raised regarding its usefulness to companies for investors. The big issue to be addressed is: What about the importance of cash flow from the investors’ perspective, specifically, the reflection of operating cash flow (OCF) information content on a company’s market value? As mentioned above, the OCF shows the company’s ability to produce cash flows from the operating activities, and for this reason, it can be used as a proxy, and thus, it reflects the market value. However, cash flows from investing and financing activities are a function of OCF because the OCF level will determine the need for external financing and future investment. Although the OCF represents real money compared to net income, there has been intense discussion in previous studies on the preference of value relevance of OCF over the value relevance of earnings. Freeman and Tse (1992) and Dimitropoulos et al. (2010) documented that investors are looking for alternative measures, other than earnings, to evaluate performance, and cash flow has become a critical value variable. Cash inflows are different from revenues because of the unearned and credit portions, while the cash outflows are different from expenses because of prepaid and accrual expenses. Investors consider OCF to be more relevant than earnings because of managers have less control over cash flows compared to net income. This will result in a difference between the value relevance of earnings and cash flows (Mirza et al. 2013). Previous studies (Kwon et al. 2009; Choi et al. 2006; Penman and Sougiannis 1998; Barth et al. 2001; Sloan 1996; Dechow et al. 1998; Charitou et al. 2000) support the value relevance of the information content of both OCF and accruals in the interpretation of market price movements and earnings. Most of these studies excluded the banking sector when studying this relationship. However,

© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9_5

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5 Data Analysis on EU and US Listed Companies

generalizing these results on banks requires further empirical investigation because of banks’ different legal status and accounting systems. A few previous studies examined the value relevance of OCF in banks. Dimitropoulos et al. (2010), who examined the association between stock returns and OCF in Greek banks, found that the OCF has incremental value relevance related to earnings. Burke and Wieland (2017) documented that the OCF is positively and significantly associated with share prices using a sample that was obtained from a major stock exchange (i.e., NYSE, NASDAQ, or AMEX). However, the results of these studies can be generalized in similar capital markets in terms of their efficiency, such as in the USA and Europe. This raises the question of the materiality of this relationship in emerging and frontier capital markets. Based on previous studies, it is possible to say that OCF has a significant positive effect on the stock market price because of the relevance of this information and its predictability and confirmability, considering the book values of the equity and accruals as control variables, according to the modified Ohlson (1995) model. Following the above studies, it is evident that OCF has a significant and positive effect on the stock market price because of the relevance of this information and its predictability and confirmability, considering the book values of the equity and accruals. Furthermore, the choice of accounting method may confuse investors, who have reduced confidence in accounting earnings and book value. However, investors will rely more on non-accrual accounting numbers (i.e., cash flows instead of accounting earnings). This hypothesis was tested in previous US studies with mixed and inconclusive results (Wilson 1986; Bowen et al. 1986; Bernard and Stober 1989; Livnat and Zarowin 1990), and the explanatory power of these earnings and cash flow models has been typically very low (Lev 1989). According to Charitou et al. (2000, p. 5), “regulatory bodies in the USA, UK, Australia, Canada and the International Accounting Standards Board (IASB) support the notion that information about cash flows, in addition to earnings, is useful in assessing share value.” Other previous studies have provided empirical evidence about the association between cash flows and earnings with security returns. Ball and Brown (1968) and Beaver and Dukes (1972) discovered that the association between security returns and earnings is higher than that between security returns and OCFs. Beaver et al. conducted a cross-sectional regression with raw returns as the dependent variable and cash flow and earnings as independent variables. In a pooled regression of observations for 1977 and 1978, the coefficient of the cash flow variable was significant and added explanatory power to the earnings variable. Thus, cash flows are associated with the share price (Charitou et al. 2000) and can better contribute to explaining the value relevance of listed companies. The extent to which the EU and US stock markets make use of equity, earnings, and cash flow data is, therefore, an important question that is addressed by the following hypotheses: Hypothesis 1: OCF is significantly and positively associated with market price in the largest European companies

5.2 The Sampling Process

55

Hypothesis 2: OCF is significantly and positively associated with market price in the largest US companies

5.2

The Sampling Process

The empirical definitions of market value, the accounting variables, and the cash flow variable in the estimated models are shown in Sect. 4.3. Firm market value is calculated as market capitalization divided by shares outstanding on the balance sheet date (all firms had 31 December year ends in 2018). Earnings are the net profit values stated in the financial statements. The OCF variable is taken from the Cash Flow Statement at the end of the year. The two original populations encompass all companies that are listed on main stock markets in the main EU areas and in the USA as identified by the ORBIS Database, from Bureau Van Dijk. The sampling process is reported as follows.

5.2.1

First Analysis of the EU Context

The sample considers the top 500 listed companies including Austria, Belgium, Germany, Spain, Ireland, Italy, the Netherlands, and Portugal. We decided to not include the UK because of the different context and capital market. The analysis covers the last available year (2018). Because data were not available, the number of companies in the first analysis was reduced to 320, which covers 64% of the original sample. Table 5.1 reports the selected companies for each country analyzed. Table 5.1 EU country coverage

Country Austria Belgium Germany Spain France Ireland Italy Netherlands Portugal Total

Firms in the sample 11 13 86 34 75 24 36 36 5 320

% 3.44 4.06 26.88 10.63 23.44 7.50 11.25 11.25 1.56 100.00

56

5.2.2

5 Data Analysis on EU and US Listed Companies

Second Analysis of the US Context

The sample covers the top 500 US listed companies in the last available year (2018). Because data were not available, the number of companies in the study was reduced to 372, which covers 74.4% of the original sample.

5.3

Variables and Model Specification

The primary goal of this study was to compare the value relevance of aggregate book value for owners’ equity and earnings in the largest EU listed companies. To test how investors value accounting and financial information, we drew upon the valuerelevant literature and considered the market value of equity as a function of book value, earnings/net income, and cash flow from operating activities. Based on a cross-national analysis, this study tests for the value relevance of stock prices using the explanatory powers of book value of equity per share (BVPS) and earnings per share (EPS) for stock market prices (Ball and Brown 1968; Beaver 1968; Ohlson 1995; Barth et al. 2008; Karampinis and Hevas 2009; Balachandran and Mohanram 2011). At first, a regression model was used to test the price (MVPS) on BVPS and EPS, as in Eq. (5.1) using the basic Ohlson model: MVPS ¼ β1 BVPS þ β2 EPS þ ε

ð5:1Þ

where MVPS is the market value per share, measured by the market capitalization divided by number shares outstanding BVPS is the book value per share, measured by the book value of equity divided by number of shares outstanding EPS is the earnings per share, measured by the net income divided by number of shares outstanding Secondly, a regress (MVPS) on BVPS, EPS, and OCF as in Eq. (5.2) is shown using the extended Ohlson model: MVPS ¼ β1 BVPS þ β2 EPS þ β3 OCF þ ε

ð5:2Þ

OCF is added to the extended model, measured by the operating earnings (E) adjusted for all non-current accruals that do not affect working capital (i.e., depreciation, amortization, deferred taxes, equity earnings), plus net changes in all working capital accounts that are related to operations, except for changes in cash, marketable securities, and debt in current liabilities (Charitou et al. 2000).

5.3 Variables and Model Specification

57

Additionally, in this case OCF is calculated “per share.” The analysis interprets the difference in adjusted R2 between Eqs. (5.1) and (5.2) as the incremental or decremental effects of OCF on price. For statistical reasons, three control variables (measured by the natural logarithm of total assets, sales, and number of employees) and two set of dummy variables (related to countries and to industry sectors) have been included. Thus, the following two regression equations test the ability of reported BVPS and EPS to explain market values. The basic pricing model is as follows: MVPSit ¼ β1 BVPSit þ β2 EPSit þ β3 Ln TAit þ β4 Ln Salesit þ β5 Ln Employeesit þ DummyAU þ DummyBE þ DummyGE þ DummySP þ DummyFR þ DummyIR þ DummyIT þ DummyNE þ DummyPO þ DummyFIN þ DummyNONFIN þ ε The extended pricing model (with the inclusion of OCF variable) to assess whether the model itself improves in terms of reliability (adjusted R-squared) is as follows: MVPSit ¼ β1 BVPSit þ β2 EPSit þ β3 OCFit þ β4 Ln TAit þ β5 Ln Salesit þ β6 Ln Employeesit þ DummyAU þ DummyBE þ DummyGE þ DummySP þ DummyFR þ DummyIR þ DummyIT þ DummyNE þ DummyPO þ DummyFIN þ DummyNONFIN þ ε where MVPS is market value per share BVPS is book value per share EPS is earnings per share OCF is operating cash flow per share LnTA is control variable 1 measured by natural logarithm of total assets LnSales is control variable 2 measured by natural logarithm of total sales LnEmployees is control variable 3 measured by natural logarithm of total employees Dummy for countries is DummyAU for Austria, DummyBE for Belgium, DummyGE for Germany, DummySP for Spain, DummyFR for France, DummyIR for Ireland, DummyIT for Italy, DummyNE for the Netherlands, and DummyPO for Portugal Dummy for industries is DummyFIN for Financial industries, DummyNONFIN for non-financial industries ε is error i is firm observation t is the last available year (2018)

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5 Data Analysis on EU and US Listed Companies

The aim of setting two models (basic and extended) derives from the need to understand whether the OCF variable may play a relevant and significant role in explaining the market value of European companies.

5.4 5.4.1

Empirical Results Descriptive Statistics on EU Context

Table 5.2 shows descriptive statistics of the variables that were used in the regression model that was applied to the European companies. Descriptive statistics results indicated that: (a) The variability of the cash flow measures is greater than the variability of the earnings measures (7.03 vs. 4.23) (b) The mean of the cash flow level variable are greater than the equivalent earnings levels statistics (6.46 vs. 2.25) The market value per share (MVPS) accounts for, on average, 36.22. Moreover, the BVPS amounts at 23.59, and EPS is 2.25 on average. For the OCF per share, the average value is 6.46, with a range of 11.44 to 41.45. Moreover, Appendix A1 presents the Pearson correlation coefficients for EU companies for all levels and changes of book values, earnings, cash flows, and Table 5.2 Descriptive statistics on the largest EU companies Variable MVPS BVPS EPS CFO LnTA LnSales LnEmployees DummyAT DummyBE DummyDE DummyES DummyFR DummyIE DummyIT DummyNL DummyPT DummyFIN DummyNON_FIN

Obs 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320

Mean 36.2261 23.5905 2.2507 6.4618 15.8969 15.5756 9.7596 0.0343 0.0406 0.2687 0.2062 0.2343 0.075 0.1125 0.1125 0.0156 0.0187 0.9812

St. dev 32.7423 26.7968 4.2336 7.0374 1.3308 1.1704 1.4739 0.1824 0.1977 0.444 0.3084 0.4242 0.2638 0.3164 0.3164 0.1242 0.1358 0.1358

Min 0.403 13.82 37.812 11.44 12.617 14.009 2.996 0 0 0 0 0 0 0 0 0 0 0

Max 139.9 168.649 29.721 41.45 19.462 18.936 13.213 1 1 1 1 1 1 1 1 1 1 1

5.4 Empirical Results

59

control variables. These results indicate that the correlation between returns and cash flows is greater than the association between returns and earnings (0.5977 vs. 0.5127). Furthermore, in Appendix B1, the multicollinearity test (VIF test) is provided, which showed that there were no collinearity problems.

5.4.2

Descriptive Statistics on US Context

Table 5.3 shows the main descriptive statistics that were used in the regression model that was applied to US companies. Descriptive statistics results showed that: (a) The variability of the cash flow measures is strongly greater than the variability of the earnings measures (20.34 vs. 3.92) (b) The mean of the cash flow level variable is greater than the equivalent earnings levels statistics (14.50 vs. 3.14) On average, the market value per share (MVPS) accounts for 55.57. Moreover, the BVPS amounts at 21.75, and EPS is 3.14 on average. For the OCF per share, the average value is 14.50, with a range of 15.27 to 303.18. Moreover, as shown by the EU context, Appendix A2 presents the Pearson correlation coefficients of US companies for all level and changes of book values, earnings, cash flows, and control variables. These results indicate that the correlation between market returns and cash flows is lower than the association between returns and earnings (0.0727 vs. 0.5473). Furthermore, in Appendix B1, the multicollinearity test (VIF test) is provided, which showed no collinearity problems.

Table 5.3 Descriptive statistics on the largest US companies Variable MVPS BVPS EPS CFO LnTA LnSales LnEmployees DummyFIN DummyNON_FIN

Obs 372 372 372 372 372 372 372 372 372

Mean 55.5733 21.7494 3.1396 14.5038 16.5986 16.4724 10.205 0.0107 0.9892

St. dev 35.0228 19.2416 3.9213 20.3426 1.1154 0.8594 1.2119 0.1032 0.1032

Min 1.32 44.7014 16.839 15.2745 14.326 15.3347 5.2149 0 0

Max 149.54 100.1876 17.9169 303.1842 20.0919 20.0585 14.6039 1 1

60

5.4.3

5 Data Analysis on EU and US Listed Companies

Regression Results on EU Context

Results for tests that examined the association between market price and explanatory measures of accounting and cash flow information are reported in Tables 5.4 and 5.5, respectively, which show models 1 and 2 for the largest EU companies. The basic model (model 1) only uses the BVPS and EPS as the summary balance sheet and income statement measures. P-values shown in the table refer to the t-test, which is the coefficient divided by the standard error. Model 1 tested whether investors included accounting information on the BVPS and EPS in their firm evaluation of EU companies. The first variable of interest (BVPS) is the value that is assumed by parameter β1, which is positive (coefficient ¼ 0.5616) and strongly statistically significant (significance is at 0.1% level). The second important variable (EPS) shows a greater positive coefficient (2.3026) and also a strong significance (0.1% level). From the model 1 analysis, both the BVPS and EPS coefficients were shown to be positively related to market per share

Table 5.4 Results on model (1) “without OCF” applied to EU companies

9.12 6.38 1.27 1.08 1.05 1.06 1.59 1.75 0.91 1.93 2.27 0.26 2.04

Number of obs F(14,305) Prob > F R-squared Adj Rsquared Root MSE P > |t| 0.000 0.000 0.205 0.281 0.293 0.288 0.112 0.082 0.362 0.054 0.024 0.793 0.042

= 23.354 [95% conf. interval] 0.4404 0.6828 1.5922 3.0131 1.5718 7.2998 8.9483 2.6053 4.327 1.3101 11.4683 38.4755 4.6333 44.2414 2.4178 40.5485 11.8488 32.3579 0.3686 42.9467 3.5054 49.0917 19.013 24.8809 0.8494 44.9999

1.85 0.01

0.066 0.994

1.2882 46.905

Source Model Residual Total

SS 175631.7 166355.5 341987.2

df 14 305 319

MS 12545.12 545.428 1072.06

MVPS BVPS EPS LnTA LnSales LnEmployees DummyAT DummyBE DummyDE DummyES DummyFR DummyIE DummyIT DummyNL DummyPT DummyFIN DummyNON_FIN _cons

Coeff. 0.5616 2.3026 2.8639 3.1714 1.5084 13.5036 19.804 19.0653 10.2545 21.289 26.2985 2.9339 22.9247 0 0 19.5726 0.174

Std. err 0.0615 0.361 2.2542 2.9357 1.4323 12.6904 12.4188 10.9175 11.2326 11.0062 11.5832 11.1532 11.2183 (omitted) (omitted) 10.6012 23.7481

t

P-value: *Sig 10% **Sig 5% ***Sig 1% ****Sig 0.1%

¼ = = = =

320 23 0.0000 0.5136 0.4912

40.4335 46.5568

5.4 Empirical Results

61

Table 5.5 Results on model (2) “with OCF” applied to EU companies

5.82 5.39 2.61 1.36 1.24 0.91 1.01 1.56 1.69 0.96 1.87 2.25 0.33 2.05

Number of obs F(14,305) Prob > F R-squared Adj Rsquared Root MSE P > |t| ****0.000 ****0.000 ***0.010 0.175 0.216 0.366 0.312 0.119 0.092 0.338 0.063 0.025 0.744 0.041

= 23.136 [95% conf. interval] 0.2932 0.5928 1.2794 2.7522 0.1838 1.3187 1.3581 7.4345 9.3477 2.1175 4.0848 1.5096 12.0077 37.4831 4.9944 43.4317 2.9819 39.5984 11.2123 32.5863 1.1052 41.8283 3.2886 48.4537 18.1375 25.3583 0.9178 44.6563

1.39

0.167

35.7559

6.2067

0.93

0.353

22.6516

63.2083

Source Model Residual Total

SS 179264.8 162722.4 341987.2

df 15 304 319

MS 11950.99 535.2709 1072.06

MVPS BVPS EPS CFO LnTA LnSales LnEmployees DummyAT DummyBE DummyDE DummyES DummyFR DummyIE DummyIT DummyNL DummyPT DummyFIN DummyNON_FIN _cons

Coeff. 0.443 2.0158 0.7512 3.0382 3.6151 1.2875 12.7377 19.2186 18.3082 10.687 20.3615 25.8712 3.6103 22.7871 0 14.7745 0 20.2783

Std. err 0.0761 0.3742 0.2883 2.2341 2.9132 1.4215 12.5751 12.3046 10.8193 11.1288 10.909 11.476 11.0519 11.1135 (omitted) 10.6623 (omitted) 21.8162

t

¼ = = = =

320 22.33 0.0000 0.5242 0.5007

P-value: *Sig 10% **Sig 5% ***Sig 1% ****Sig 0.1%

as well as statistically significant. The overall explanatory power is significant (F test [14, 305] ¼ 23, P < 0.0000), with an adjusted R-squared value of 0.4912. Model 2 tested a further measure of the OCF on EU companies. The explanatory power is even more significant compared to model (1), with an overall adjusted Rsquared value of 0.5007. The OCF measure is found to be positively and significantly related to the market value (coefficient is 0.7512, and its significance is at 1% level). Using the variable OCF counting the cash flow from operating activities divided by the number of shares that were outstanding, the results demonstrate that adding up a measure based on cash the model increases in reliability that is justified by a higher adjusted R-squared value. Thus, OCF improves the fit of the model to the collected data: R-squared has increased, shifting from 0.4912 to 0.5007. These results are consistent with those of other studies, which found that companies that have better cash flows from operating activities would benefit from a better reputation and appreciation have quicker access to capital markets and achieve

62

5 Data Analysis on EU and US Listed Companies

higher stock return values. Further empirical evidence has been provided, reporting that a better understanding of the Cash Flow Statement from the largest European companies will produce higher market values. The Appendix also reports the correlation matrix, the scatter plot graph for the extended model, and the adequate test for collinearity (variance inflation factor) showed a multicollinearity problem. In addition, for a further robustness test, the Breusch–Pagan test for controlling the heteroscedasticity was also shown.

5.4.4

Regression Results on US Context

Results for tests examining the association between the market price and explanatory measures of accounting and cash flow information are reported in Tables 5.6 and 5.7, respectively, showing models 1 and 2 of the largest US companies. The basic model (model 1) only uses the BVPS and EPS as the summary balance sheet and income statement measures. P-values shown in the table refer to the t-test, which is the coefficient divided by the standard error. Model 1 tested on US companies the ability of accounting information (book value of equity and earnings per share) to show the market value. The first variable of interest (BVPS) is the value that is assumed by parameter β1, which is positive (coefficient ¼ 0.34) and strongly statistically significant (significance is at 0.1% level). The second important variable (EPS) shows a greater positive coefficient equal to 4.11 and also a strong significance (0.1% level). Table 5.6 Results on model (1) “without OCF” applied to US companies Source Model Residual Total

SS 178218.1 276849.2 455067.2

MVPS Coeff. BVPS 0.3441 EPS 4.1084 LnTA 4.9582 LnSales 4.3672 LnEmployees 6.3123 DummyFIN 19.9935 DummyNON_FIN 0 _cons 39.804

df 6 365 371

Std. err 0.0829 0.4073 1.8803 2.6856 1.395 13.9 (omitted) 27.7717

4.15 10.09 2.64 1.63 4.52 1.44

Number of obs F(14,305) Prob > F Rsquared Adj Rsquared Root MSE P > |t| 0.000 0.000 0.009 0.105 0.000 0.151

[95% conf. interval] 0.1809 0.5073 3.3074 4.9094 1.2605 8.6558 s9.6484 0.914 3.569 9.0555 7.3406 47.3277

1.43

0.153

94.4167

MS 29703.01 758.4908 1226.596

t

P-value: *Sig 10% **Sig 5% ***Sig 1% ****Sig 0.1%

¼ = = =

372 39.16 0.0000 0.3916

=

0.3816

=

27.541

14.8087

5.4 Empirical Results

63

Table 5.7 Results on model (2) “with OCF” applied to US companies Source Model Residual Total

SS 187,803 267264.2 455067.2

df 7 364 371

MS 26,829 734.2423 1226.596

MVPS BVPS EPS CFO LnTA LnSales LnEmployees DummyFIN DummyNON_FIN _cons

Coeff. 0.2967 4.4972 0.2607 4.546 4.2451 6.0844 21.1688 0 36.6326

Std. err 0.0827 0.4149 0.0721 1.8535 2.6425 1.3739 13.6798 (omitted) 27.3383

t 3.59 10.84 3.61 2.45 1.61 4.43 1.55

Number of obs F(14,305) Prob > F R-squared Adj Rsquared Root MSE P > |t| 0.000 0.000 0.000 0.015 0.109 0.000 0.123

1.34

0.181

¼ = = = =

372 36.54 0.0000 0.4127 0.4014

= 27.097 [95% conf. interval] 0.134 0.4593 3.6812 5.3132 0.1188 0.4026 0.901 8.191 9.4417 0.9514 3.3825 8.7863 5.7326 48.0704 90.3934

17.1282

P-value: *Sig 10% **Sig 5% ***Sig 1% ****Sig 0.1%

The results of model 1 in the US context are consistent with the EU context, and it reports that both the BVPS and EPS coefficients are positively related to market per share, and they are statistically significant. The overall explanatory power is significant (F test [14, 305] ¼ 39.16, P < 0.0000), with an adjusted R-squared value of 0.3816. Model 2 tested a further measure of the OCF for US companies. The explanatory power is even more significant compared to model 1, with an overall adjusted Rsquared value of 0.4014. The OCF measure was found to be positively and significantly related to market value (coefficient is 0.2607, and its significance is at 0.1% level). Using the variable OCF counting the cash flow from operating activities divided by the number of shares outstanding, the results demonstrate that adding up a measure based on cash, the model increases in reliability, which is justified by a higher adjusted R-square. Thus, OCF improves the fit of the model to the collected data, which is shown by the increase in R-squared, shifting from 0.3816 to 0.4014. These results are consistent with those of other studies, which found that companies that have better cash flows from operating activities would benefit from a better reputation and appreciation and can access capital markets more quickly and achieve higher stock return values. Further empirical evidence has been provided, reporting that a better understanding of the Cash Flow Statement from the largest European companies will produce higher market values.

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5.4.5

5 Data Analysis on EU and US Listed Companies

Robustness Check

The association of operating cash flow and accruals with security returns is shown in the above analysis. The results support the association of both operating cash flow and aggregate accruals with market returns. These results are robust across the two models that were applied (i.e., models 1 and 2) for the variables, and several tests of robustness were conducted to ensure the reliability of the above findings as follows: the VIF test showed no multicollinearity problems; and heteroscedasticity, using the Breusch–Pagan test, indicated no constant variance in the error from both regressions for EU and US companies.1 Finally, Wald tests were used to examine the change in value relevance of direct cash flow disclosures, and the results were also consistent.

5.5

Conclusion and Discussion

This study shows that OCF has informative content in both markets with a positive and significant relationship with market price in the main European markets and in the US stock market. The extended cross-sectional regression (model 2) shows that OCF is relatively more important than the aggregated combination of accrual numbers (BVPS and EPS) with respect to market prices of EU and US companies. In a reasonable manner, findings highlight investor awareness concerning the impact of OCF; this explains the efficiency level of the European and US markets. All of the components of accruals (BVPS and EPS) in both models are strongly significant together with the main component of cash flows (OCF). The difference between the results for the two models (models 1 and 2) that were applied to EU and US contexts demonstrates that inclusion of cash flow-based variables produces a better understanding of market value. These results are consistent with previous studies (Charitou et al. 2000; Cheng et al. 1997; Gombola and Ketz 1983), which showed that cash flows play an important role in the US capital market. A major motivation of this analysis is to extend previous US research to examine the information content of earnings and cash flows in the largest European companies using a contextual model that incorporates the possible effects of earnings permanence on earnings and cash flow response coefficients. The analysis shows strong empirical evidence that when financial statements are broken down into accruals and cash components, there is a greater value relevance perceived by the investors. The value relevance of the reported losses is lower than that of profits. However, the value relevance of “OCF” that is not reported in the 1

The Appendix reports the correlation matrix, the scatter plot graph for the extended model, and the adequate test for multicollinearity (variance inflation factor). In addition, for further robustness test, the Breusch–Pagan test for controlling the heteroscedasticity was also shown.

5.5 Conclusion and Discussion

65

income statement or in the balance sheet cannot be negligible when it is assessed in the context of the entire database of active firms at year end (31 December). This study provides evidence on how various stakeholders perceive the accruals and cash performance for European and US listed companies and presents the implications for external users such as investors that are becoming increasingly mindful of companies’ performance, by choosing, for example, sustainable and responsible investments. Previous studies on the value relevance of accruals and cash flows investigating potential differences in value relevance for the two components focused primarily on the persistence of the components in predicting the market value (Barth et al. 1999). Thus, our findings suggest that, consistent with the accounting-based valuation model of Ohlson (1995, 1999), the interaction between two key components results in a greater market value. Implications may also be important for standard setters because they are interested in whether to require disclosure on cash-based measures in the compulsory part of the annual report, by introducing explicit reporting rules or standards, in addition to the EU Directive 34/2013. This study contributes to the debate on the value relevance of OCF incremental to book value and earnings. It also extends the literature, showing that OCF has an information content (value relevance) that is superior to the earnings and book value in the main European markets (Bepari et al. 2013). Another contribution was documented by the decreased value relevance of the equity book value and the increased value relevance of cash flows in equity valuation at the European level. The main limitation of this study is that the sample size is rather small, and the time period covers only 1 year. Thus, these findings must be taken and analyzed with caution. Examining the data from the largest European companies also shows some troubling factors that are attributed to the singular characteristic of financial and stock market mechanisms. This study seeks to overcome the problems of different contexts that are analyzed by using dummy variables, but some other problems still exist. There are several research areas for future projects. First, the conclusions of this study may be explored by a qualitative research including interviews with managers and investors to test their validity or conducting a survey analysis. Future studies could investigate the manner in which managers and investors recognize the importance of disclosing more information on cash flows. Second, future contributions might also consider the disclosure of the cash flow statement from a cost–benefit perspective. Third, it would be interesting to consider other kinds of cash flow information such as investing and financing based on drawing up other cash flow measures (i.e., it would be useful to estimate OCF divided by the total cash generated/absorbed during the year). For the non-financial disclosure, researchers have much to do to meet the challenges of value relevance of the cash flow disclosure. This analysis should encourage future work that may improve the understanding of the role of earnings and cash flows in explaining securities prices. The analysis suggests similarities between the main European markets and the US markets related to the incremental information content of earnings and cash flows and the relevance of the earnings permanence hypothesis in both capital market settings.

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In conclusion, future contributions could be useful in comparing the joint role of earnings and cash flows in explaining security returns in these and other capital markets using methodologies that allow a more detailed assessment of the impact of accounting practice on earnings and cash flow response coefficients.

References Balachandran S, Mohanram P (2011) Is the decline in the value relevance of accounting driven by increased conservatism? Rev Acc Stud 16(2):272–301 Ball R, Brown P (1968) An empirical evaluation of accounting income numbers. J Account Res 6:159–178 Barth ME, Beaver WH, Hand JR, Landsman WR (1999) Accruals, cash flows, and equity values. Rev Acc Stud 4(3–4):205–229 Barth ME, Beaver WH, Landsman WR (2001) The relevance of the value relevance literature for financial accounting standard setting: another view. J Account Econ 31(1–3):77–104 Barth ME, Landsman WR, Lang MH (2008) International accounting standards and accounting quality. J Account Res 46(3):467–498 Beaver WH (1968) Alternative accounting measures as predictors of failure. Account Rev 43 (1):113–122 Beaver WH, Dukes RE (1972) Interperiod tax allocation, earnings expectations, and the behavior of security prices. Account Rev 47(2):320–332 Bepari K, Rahman SF, Mollik AT (2013) Value relevance of earnings and cash flows during the global financial crisis. Rev Account Financ 12:226 Bernard VL, Stober TL (1989) Nature and amount of information in cash flows and accruals. Account Rev 64:24–52 Bowen R, Burgstahler D, Daley L (1986) The incremental information content of accruals versus cash flows. Account Rev 62:723–747 Burke QL, Wieland MM (2017) Value relevance of banks’ cash flows from operations. Adv Account 39:60–78 Cheng CA, Chao-Shin L, Schaefer TF (1997) The value-relevance of SFAS No. 95 cash flows from operations as assessed by security market effects. Account Horiz 11(3):1 Charitou A, Clubb C, Andreou A (2000) The value relevance of earnings and cash flows: empirical evidence for Japan. J Int Financ Manag Acc 11(1):1–22 Choi HS, Jang JI, Shin SC (2006) The relative value-relevance of earnings and cash flow measures in each life-cycle stage. Korean Manag Rev 35(5):1339–1360 Dechow PM, Kothari SP, Watts RL (1998) The relation between earnings and cash flows. J Account Econ 25(2):133–168 Dimitropoulos PE, Asteriou D, Koumanakos E (2010) The relevance of earnings and cash flows in a heavily regulated industry: evidence from the Greek banking sector. Adv Account 26 (2):290–303 Freeman RN, Tse SY (1992) A nonlinear model of security price responses to unexpected earnings. J Account Res 30(2):185–209 Gombola MJ, Ketz JE (1983) A note on cash flow and classification patterns of financial ratios. Account Rev:105–114 Karampinis N, Hevas D (2009) The effect of the mandatory application of IFRS on the value relevance of accounting data: some evidence from Greece. Eur Res Stud 12(1) Kwon YK, Newman P, Zang Y (2009) The effects of accounting report quality on the bias in and likelihood of management disclosures. Available at SSRN 1399863 Lev B (1989) On the usefulness of earnings and earnings research: lessons and directions from two decades of empirical research. J Account Res 27:153–192

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Livnat J, Zarowin P (1990) The incremental information content of cash-flow components. J Account Econ 13:25–46 Mirza N, Afzal A, Rizvi SKA, Naqvi B (2013) Can current earnings predict future cash flows? A literature survey. Res J Recent Sci. ISSN 2277-2502 Ohlson JA (1995) Earnings, book values, and dividends in equity valuation. Contemp Account Res 11(2):661–687 Ohlson JA (1999) On transitory earnings. Rev Acc Stud 4(3–4):145–162 Penman SH, Sougiannis T (1998) A comparison of dividend, cash flow, and earnings approaches to equity valuation. Contemp Account Res 15(3):343–383 Sloan RG (1996) Do stock prices fully reflect information in accruals and cash flows about future earnings? Account Rev:289–315 Wilson G (1986) The relative incremental information content of accruals and cash flows: combined evidence at the earnings announcement and annual report date. J Account Res 24:165–200

Chapter 6

Concluding Remarks: The Importance of Cash Flow Statement

6.1

The Relevance of the Cash Flow Statement

The most important element of the Cash Flow Statement is not the change in a stock financial resource between the beginning and end of the period, which can be found in the balance sheet, regardless of the financial resources that are referenced (cash or net working capital), but, rather, it is represented by the individual types of change and related causes (Allegrini et al. 2014). In addition to the financial resources and the types of changes, the statement includes another element—the classification of cash flows into operating, investment, and financing categories. The Cash Flow Statement is most capable of highlighting the financial dynamics, of which the interpretation lies in the “causes that determined the change in the ‘stock’ amount of the reference resource, i.e. the amount and sign of the individual classes of cash flows” (Allegrini et al. 2014, p. 77). What are the reasons that lead a company to measure a financial quantity such as cash flow? Everything starts from the income statement write-downs, provisions, depreciation and amortization, and inventories that need to be removed to arrive at the cash flow numbers. In addition, these components represent highly subjective quantities on which earnings management practices are likely to be implemented, rather than distorting the objective value of cash or other monetary resources. Cash flow is a control tool for financial management (cash management) and an external communication tool. In this context, coding regulations and accounting principles oblige companies to increase the disclosures that they provide to financial institutions because they have made the financial statements mandatory, i.e., an integral part of the financial statements. Cash flow can also be used as a support tool for the following: (a) Operations to understand the liquidity that is to be allocated to operating activities and financial policies for deciding on the value of dividends that are © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9_6

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6 Concluding Remarks: The Importance of Cash Flow Statement

to be distributed; the amount of cash flows from operating activities is an important indicator of the extent to which a firm generates cash flows that are necessary for repayment of debts, maintenance of capabilities, dividends payment, and investments without relying on external financial resources. (b) Investment policies to decide how much liquidity to provide for the investment process. (c) Financing policies to decide which financial structure to use to ensure a proper balance between external funding sources and self-financing. This work shows the crucial importance of the Cash Flow Statement as a management, control, and external communication tool, particularly for listed companies. Valuations on the financial markets are conditioned by the ability to generate positive operating cash flows.

*** The phenomenon of inflation may have facilitated the dissemination of the document because the economic data are more vulnerable to the effects of increased prices which diminish the relevance of other forms of information. The other financial statements present disadvantages because many values are anachronistic during periods of strong monetary inflation. Further tools for understanding financial dynamics facilitate, in this context, knowledge about the phenomenon. The Cash Flow Statement was created as an easy-to-read tool to facilitate the understanding of the accounting logics that are contained in traditional financial statements, providing the possibility of performing more immediate comparative analyses for different companies and allowing the analysis and interpretation of the company on financial dynamics, not only on the concept of income, which is widely spread by practice and doctrine.

6.2

The Lack of Information Capacity in the Financial Statements and Accruals in the Interpretation of Financial Reporting

To communicate their activities, companies use a technical means of accounting communication that is representative of their economic, financial, and patrimonial situation. These are the financial statements, within which the accounting logic dictates the recording of company events. Thus, the financial statements represent the system of internal value formation mechanisms and the continuous exchange of communication flows that are established between the company and the environment in which it operates. The first fundamental step to try to extrapolate a satisfactory amount of information from the financial statement data is the economic integration of the data that are reported in the balance sheet and income statement with the non-accounting

6.3 The Cash Flow as a Tool to Overcome Some Limits

71

information that is available in all other financial statement documents, first of all in the notes to the financial statements. There remain, however, limits that are implicit in the nature of the documents that make up the financial statements for the year, one of which is the lack of ability to describe the nature, origin, and subsequent interpretation of monetary flows. For example, the income statement shows in a rather exhaustive way the income trend and the final measurement of the net result for the year. Additionally, the balance sheet only shows the balance sheet and financial items at the end of the administrative period, providing a monetary “cash and cash equivalents,” but without going into detail and providing information on the causes and consequences that the company’s management has had on them. Therefore, the balance sheet and income statement are inadequate to draw the financial dynamics for the support of the company’s management, and the Cash Flow Statement was introduced. Their preparation was initially suggested, and then companies were obliged to draw them up for certain companies, which do not allow the total to exceed the information limits of the financial statements, but, at least, it represents a further step to make the content of the monetary dynamics understandable and interpretable.

6.3 6.3.1

The Cash Flow as a Tool to Overcome Some Limits A Tool to Improve “Disclosure”

The complexity of the economic scenario has also profoundly changed the purpose of financial reporting. The set of documents made available by companies contains communication elements that must deviate from the minimum content that is proposed by the financial statements and defined by law. If the mandatory accounting documents are not able to meet the need for information, the company must also make use of additional information to reach a level of information that is considered satisfactory. The purpose of mandatory disclosure is to match the amount of information that is produced by companies that also communicate voluntary information (voluntary disclosure) to try to be better appreciated by investors and other stakeholders. The need to develop improved communication for all stakeholders has led companies to produce additional documents, one of which is the Cash Flow Statement. It contributes to the strengthening of the information flow by activating a series of appreciable information as more stakeholders are able to interpret the dynamics of liquidity. The greater degree of detail about financial trends benefits a wider range of stakeholders. The sentence by Akbar et al. (2011, p. 1) is crucial to understand the disclosure of cash flow:

72

6 Concluding Remarks: The Importance of Cash Flow Statement Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements—providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms— is still subject to debate.

6.3.2

A Tool to Overcome the Limits of “Static” Representation of Values

The purpose of the financial statements is to provide a comprehensive and total view of the company’s economic, equity, and financial situation. The informative scope of the financial statements, however, provides that the values are able, through a system of analysis, to analyze the two conditions upon which the company is based: economic balance and financial balance. To obtain information about the balances, there are various techniques for interpreting the data, including the following: (a) The comparative analysis of balance sheet items, through the comparison of the data that are present in two balance sheets at closing periods. (b) Reclassifications of the balance sheet and income statement. The balance sheet format follows the financial criterion that makes it possible to distinguish between short-term balance sheet items (current assets and liabilities) and long-term balance sheet items (fixed assets and consolidated liabilities) and, also, the liquidity criterion such that a company meets the conditions of financial equilibrium when short-term income is able to meet expenditure of equal maturity. The income statement is reformulated through an analysis of costs and revenues based on the management area that produced them to highlight the contribution of each to the final net profit; and (c) The balance sheet indices, which are grouped into different categories based on the type of balance to be analyzed: income-based (ROE, ROI, etc.) or financialbased (quick ratio, leverage, etc.). These ratios have a limit to how much they are influenced by the reclassifications of the financial statements, which do not provide for a predefined structure, but very often follow the peculiarities of the company. In addition, they always provide a static analysis of actual balance sheet data. To try to overcome the limits provided by static analysis and represent the company’s financial situation in a dynamic way, it is necessary to analyze the composition of cash inflows and outflows, as well as the related time variations, by constructing a statement that provides a general overview of financial dynamics: the Cash Flow Statement. With the Cash Flow Statement and the analysis of the dynamism of incoming and outgoing cash flows divided into various areas, it is possible to clarify the interconnections that exist between the strategies of each economic institution. The types of

6.3 The Cash Flow as a Tool to Overcome Some Limits

73

reporting, which are provided for by the accounting standards, provide for different forms depending on the context of the reference, even if, in Italy, we are witnessing, as mentioned several times, a process of convergence toward IAS 7. The importance that was recently attributed to the Cash Flow Statement in the Italian context is evidenced by the replacement of the provisions that were previously provided for in OIC 12 (“Composition and format of financial statements of merchant, industrial and service companies”) with a new national accounting standard (OIC 10) that was specifically dedicated to this document. The Cash Flow Statement has the ability to communicate to the recipients of the financial statements the information and data relating to the financial situation and to allow the evaluation of liquidity and financial solvency through the analysis by flows that represent valid diagnostics of the financial statements, which are also from a forecasting perspective. As mentioned above, the Cash Flow Statement represents a valid management tool that distinguishes between three categories of analysis: operational management (fueled by the characteristic management of the company); investment activities (characterized by financial flows that move the acquisition and disposal of fixed assets and non-fixed financial assets); and financing activities (which include cash flows originating from obtaining or returning external or internal financing). In addition, for the reporting formats, both IAS and OIC allow for the construction of the flow deriving from income management through two methods: direct or indirect.

6.3.3

A More Suitable Tool for Measuring Insolvency

The Cash Flow Statement is also an important tool for the analysis of insolvency from a predictive point of view. In recent years, the need to adopt suitable forecasting tools, especially financial tools, to overcome the crisis and restore the going concern promotes the activation of restructuring processes (Pollio 2013; Pozzoli and Paolone 2017). The use of “static” balance sheet analysis through the calculation of indices for measuring insolvency dates back to the period between the end of the last century and the beginning of this century, with the development of some models that have attempted to estimate the probability of insolvency. The most widespread that are worth mentioning are presented below: (a) The Beaver analysis (1966), with the univariate approach (analysis of the impact of a single indicator on the probability of insolvency) (b) The Altman Z-Score (1968), with the multivariate methodology (analysis of the impact of different indicators on the probability of insolvency), which represents a relevant contribution and qualifying itself as the model that is able to estimate company insolvency better than the other models by minimizing possible risks of statistical–methodological errors

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6 Concluding Remarks: The Importance of Cash Flow Statement

Other important statistical models have been developed in subsequent years by Deakin (1972), Edmister (1972), Moyer (1977), Alberici (1975), Ohlson (1980), Zmijewski (1984), Holmen (1988), and Altman. These have applied to emerging countries (Altman et al. 1995; Altman 2006). One of the limits that these models present is that they analyze synthetic components of a “static” type that was constructed based on data collected from summary accounting schedules (Profit and Loss Account and balance sheet), which do not provide a dynamic monetary analysis but, rather, provide only the static–economic– equity analysis. There have been several critical indices, defining them as being “of a financial nature,” but static in their interpretation in so far as they refer exclusively to the traditional financial statements: (a) (b) (c) (d)

The rotation rate of trade receivables The rotation rate of inventories The balancing rate between internal and external sources of financing The liquidity ratio

These indicators have a poor signaling capacity because they may constitute “false positives” that have nothing to do with the alert of a state of crisis because of the static nature of the information that is useful for the calculation. The rotation rate of trade receivables and the rotation rate of inventories are measures of income flow (sales revenues) and asset flow (respectively, trade receivables and warehouse), which are limited because they do not have acceptability thresholds and differ strongly between the different markets. The balancing rate between internal and external sources of financing is an attempt to block the acceleration of the financial debt, which is the main signal of the “probability of future insolvency.” Notwithstanding the fixed thresholds of “acceptability” (between 1 and 2; if the result is greater than 2, the structure is unbalanced), this indicator shows the capacity to block the debt through income flows, which cannot always be transformed into monetary flows. The cash flow is immediately available to pay off the debt. The liquidity index provides the most appropriate measure to assess the level of financial equilibrium in the short term, but in this case, the data that are necessary for the calculation can be found on the balance sheet. The main problem connected to these indicators and predictive models lies precisely in the static nature of the indices that are used to estimate insolvency. In this context, the Cash Flow Statement provides more significant summary measures such as the operating cash flow (OCF), which represent the most suitable indicators for measuring the degree of insolvency, and they include the NFP/OCF and OCF/net invested capital indices. In particular, we cannot overlook the NFP/OCF index where NFP is the net financial position and OCF is the cash flow generated by operating activities. This measure greatly facilitates the comparison between a financial measure (Financial Debt) and a cash flow servicing the financial debt with the objective of estimating the average time to repay the debt through operational cash flows.

6.3 The Cash Flow as a Tool to Overcome Some Limits

75

Another dynamic measure of synthesis can be represented by the relationship between OCF and net invested capital, which indicates the ability to finance investments made through the generation of cash flows related to operations (OCF/net invested capital).

6.3.4

A More Accurate Tool for Business Evaluation

The capital and income methods have often been found to be inadequate for the valuation of a company, while the Cash Flow Statement provides a further important stimulus in the valuation and serves as a basis for estimating future cash flows. This methodology, inspired by the basic concept that the company value is a function of the liquidity that it is able to generate, and it considers the company to be a specific and complex investment that consists in discounting relevant and prospective cash flows. From the point of view of economic rationality, the Cash Flow Statement helps considerably to make the financial method even more consistent with the nature of the problem, which considers the company to be a macro-investment. Despite some criticism, including the difficulty of estimating cash flows over a long period of time and the prediction conditioned by subjective assumptions, the financial method, which is built on the basis of the Cash Flow Statement, provides evidence for the value of the company’s operating activities. It tends not to influence the operating value, which is understood to be the propensity to generate operating cash flows based on a cost of capital, and considered separately, the value of any non-operating accessory assets. Moreover, the financial method based on the Cash Flow Statement assumes that the income for the year, which is determined on an accrual basis, is not useful until it is transformed into cash flow. Finally, it can be concluded that the company creates value by being able to realize and distribute a benefit because of its management cycle. Through the production of cash, the company is able to remunerate capital holders and to guarantee self-financing and new investments. The component of the flows presents, unlike income flows which are very often subject to discretionary valuation and a high level of analysis objectivity. Finally, regardless of the level of detail that is adopted in estimating future cash flows, a greater degree of uncertainty is attributable to a medium to long-term time horizon, which leads to the adoption of prospective analyses based on shorter horizons.

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6.4

6 Concluding Remarks: The Importance of Cash Flow Statement

The Persistence of Other Limits and a Further Attempt to Overcome Them: The EU Directive 95/2014 and the Integrated Reporting

The disclosure requirements for financial statements and cash flow statements often tend to result in rigid, purely technical rules that consist of a degree of detail, which risks neglecting some important issues. To ensure that these summary elements on the financial statements are not neglected in the accounting sense, an important role is played by the disclosure of intangibles, including intellectual capital, credibility, inimitability, and speed of internal development processes. The problem that scholars are trying to overcome is that these elements represent important aspects that neither the financial statements nor the cash flows are able to capture, and they do not lend themselves to an objective monetary valuation. Thus, the importance of the financial information that can be inferred from the financial statements consists of logic for reporting economic–financial data, but without being able to report several aspects that are considered to be important for the life of a company. Adoption of voluntary communication practices is becoming increasingly widespread, which is made even more important by changes in the institutional and operational context and pressure from various categories of stakeholders. Companies are obliged to provide a large amount of information, which is sometimes variable and not relevant to understand its value. Often, excess data can conceal relevant information. The need to condense the data provided by companies, thus, results from the focus of their efforts on only some of the countless pieces of information. At the international level, there are two different approaches that follow two standards for communicating non-financial information: 1. The International Integrated Reporting (IR) Framework of the International Integrated Reporting Council (IIRC) 2. The Sustainability Reporting (SR) guidelines that were established by the Global Reporting Initiative (GRI) With reference to the first standard, the International Integrated Reporting Council (IIRC), in September 2011, issued a public document with an international scope that highlights the need to structure a general framework for integrated reporting that is applicable to all companies worldwide. The IIRC establishes a set of six different capitals around which financial and non-financial reporting revolves. The IR Framework, which is based on the value creation process, indicates some components that are necessary to make the business model more effective, including:

6.4 The Persistence of Other Limits and a Further Attempt to Overcome Them: The EU. . .

77

Fig. 6.1 Source: The value creation process according to the Framework IR. IIRC, IR Framework 2013, p. 13

(a) Identifying the key elements of the business model (inputs, outputs, activities, and outcome/impacts) (b) A diagram highlighting the relevance of the key elements, which also provides a detailed explanation (c) The definition of logical descriptive flow for the specific business circumstances (d) The identification of “relevant” stakeholders and critical factors affecting the external environment (e) The link with the strategy, including measurement of risks, opportunities, and performance The graph below shows the value creation process envisaged by the IR Framework, which is used to define the company’s business model (Fig. 6.1). To complement the IIRC model, there is a second standard, which is Global Initiative Reporting (GRI) that sets out the following guidelines in the section “Strategy and Analysis”: (a) The statement of top management (e.g., the Chairman, the Chief Executive Officer) and evidence of strategic priorities in the area of sustainability (b) The definition of the “outcomes” on sustainability (economic, environmental, and social impacts), the impact on stakeholders, in full consideration of their rights and objectives (c) The description of suitable processes for achieving strategic objectives and a related performance (d) The description of the main risks and opportunities related to sustainability aspects and their trends (e) The hierarchy of key sustainability aspects for the organization in the process of creating value in the financial sector

78

6 Concluding Remarks: The Importance of Cash Flow Statement

(f) The governance mechanisms that are suitable for controlling the related risks and opportunities Additionally, in the GRI (“Organizational Profile” paragraph), other elements are explained to supplement the business model provided for in the IIRC, as follows: (a) The company’s main brands, products, and services (b) The countries in which the company operates or those that are relevant to sustainability (c) Market segments and customers (d) The company’s supply chain In the description of the WB, therefore, the GRI also adopts a perspective that is focused on the analysis of non-financial impacts, specifically environmental and social impacts. A significant step toward the introduction of non-financial disclosure and information on diversity is represented by the issuance of the European Directive 2014/ 95/EU. This disclosure becomes mandatory starting from the financial statements of companies that are listed on the EU regulated markets as of 31 December 2017. This Directive leaves wide discretion with regard to some suitable information elements with the aim of expanding disclosure, and it provides guidelines for the definition of some critical elements that are to be included in the statement, relating to five specific aspects such as environmental aspects, social aspects, personnel aspects, respect for human rights, and the fight against corruption. The integration of environmental and social factors (ESG—environmental, social, and governance) becomes increasingly important for risk analysis because it represents the non-financial element that can impact on the strategy and future prospects of companies. Particular attention is paid to the risk factors that are linked to the non-financial components (“sustainability risks”), which have an analysis that presupposes that the issue of sustainability is part of the company’s strategic vision. Thus, this analysis requires a measurement of the risks that are related to the aforementioned environment, social, and governance (ESG) factors and monitoring of potential risks that are related to the possible lack of a sustainable approach. The definition of sustainability risks and their integration into the company’s internal control system represents further steps forward in monitoring the various forms of risk, size, and probability of which strongly depend on the characteristics of the individual company and its sector. In this context, a more complete presentation of the risks and a more objective interpretation of the data is appropriate, particularly related to the “key” performance indicators (KPIs), which are the prerequisite for “meeting” internal and external stakeholders and, consequently, starting a virtuous circle between all those who affect the quality of business life. The directive has been transposed into Italian law by Legislative Decree no. 254/2016, which applies to financial years starting from 1 January 2017.

6.5 Concluding Remarks

79

The Italian legislator has proposed an extension of the cases that were provided for by the Directive, which also allow for companies that are not obliged to voluntarily submit such non-financial declarations, in accordance with the provisions of art. 7 “Voluntary declarations of a non-financial nature in compliance.” The evolution in the quality of reporting, especially non-financial reporting, finds its pivotal element in the integrated reporting tool. The purpose of integrated reporting is not to replace the financial statements, corporate governance information, and social responsibility that large companies already communicate but rather to integrate the disaggregated information by offering a faithful representation of the company’s management. From the information point of view, integrated reporting emphasizes the legitimacy theory approach, within which the company provides its financial statement disclosures, and this protects its legitimacy. The integrated report, with a predominantly flexible structure, is compiled based on the specific needs of the company, with particular attention to the individual elements that represent its reality (Abeysekera 2013; Brown and Dillard 2014; Busco 2016; Busco et al. 2018; De Villiers et al. 2014). Integrated reporting represents a new tool for story-telling of the company’s activity, which covers a form of communication and not information involving a large register of stakeholders. It is destined to bring further novelty to the techniques of drawing up financial statements which, to date, can no longer be considered traditional (Dumay et al. 2016; Eccles and Krzus 2010; Frias-Aceituno et al. 2013; Pozzoli 2018; Stubbs and Higgins 2014; Van Bommel 2014).

6.5

Concluding Remarks

When used jointly with other financial statements, the Cash Flow Statement is useful for measuring changes in net assets, financial structure, and the ability to adjust the amount and timing of cash flows to adapt to changing circumstances and opportunities. In addition, cash flow information is useful for providing the ability to generate cash and cash equivalents, thereby eliminating the impact of applying different accounting policies to the same transactions as well as increasing the comparability of companies to operating performance. With the inclusion of the Cash Flow Statement as a mandatory schedule, the geography of the financial statements changed radically. The financial statements must be able to jointly represent the impacts that are generated by the business operations on the following three different quantities (Assets, Income, and Money). Taking on the third aspect changes them from a two-dimensional to a threedimensional representation. The effects of this “regulatory earthquake” were significant because, on the one hand, financial dynamics can no longer be neglected and, secondly, it has become necessary to have a system that is capable of integrating financial statements with

80

6 Concluding Remarks: The Importance of Cash Flow Statement

financial statements. A “documental system” that is capable of merging the three complex and different quantities (equity, income, and money) is required to permit the dimensions of business analysis (equity, economic, and financial). Another consequence was that working capital, which was a key concept in international accounting practice, as an indication of monetary resource, became obsolete. The focus must be shifted to cash and cash equivalents, as originally envisaged by IAS 7. However, although it represents a further step toward improving financial reporting, the Cash Flow Statement has some limitations that may be overcome by regulatory interventions, such as Directive 2014/95/EU, which requires complete disclosure for not only accounting and financial purposes but also for social, environmental, intellectual, human, and governance information. Some areas that were neglected before now have clear emerging profiles, as Quagli argues “for which it is much more difficult for an analyst to obtain information if not from . . . (a company’s) management” (Quagli and Teodori 2005, p. 433). The Cash Flow Statement tells us how much cash went into and out of the company during a specific time frame; this statement sounds very similar to the income statement, which shows how much revenues came in and how many expenses went out. The different between the two reports lies in a principle called accrual accounting that requires companies to record revenues and expenses when transactions occur, not when the cash is exchanged. This work empirically demonstrates at both European and US level that Cash Flow Statement is very important to investors and there is a growing need to understand and interpret each single component of Cash Flow Statement, specifically the operating cash flow.

References Abeysekera I (2013) A template for integrated reporting. J Intellect Cap 14(2):227–245 Akbar S, Shah SZA, Stark AW (2011) The value relevance of cash flows, current accruals, and non-current accruals in the UK. Int Rev Financ Anal 20(5):311–319 Alberici A (1975) Analisi dei bilanci e previsione delle insolvenze: affidabilità bancaria e informativa del mercato mobiliare. Isedi Allegrini M, Giorgetti F, Giulio G (2014) Il rendiconto finanziario: Logiche di costruzione e di interpretazione. G Giappichelli Editore Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Financ 23(4):589–609 Altman EI (2006) Default recovery rates and LGD in credit risk modeling and practice: an updated review of the literature and empirical evidence. New York University, Stern School of Business Altman EI, Eom YH, Kim DW (1995) Failure prediction: evidence from Korea. J Int Financ Manag Acc 6(3):230–249 Beaver WH (1966) Financial ratios as predictors of failure. J Account Res 4:71–111 Brown J, Dillard J (2014) Integrated reporting: on the need for broadening out and opening up. Account Audit Account J 27(7):1120–1156 Busco C (2016) Integrated reporting. Springer

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Busco C, Izzo MF, Granà F (2018) Sustainable development goals and integrated reporting. Routledge, London Deakin EB (1972) A discriminant analysis of predictors of business failure. J Account Res 10:167–179 De Villiers C, Rinaldi L, Unerman J (2014) Integrated reporting: insights, gaps and an agenda for future research. Account Audit Account J 27(7):1042–1067 Dumay J, Bernardi C, Guthrie J, Demartini P (2016) Integrated reporting: a structured literature review. Account Forum 40(3):166–185 Eccles RG, Krzus MP (2010) One report: integrated reporting for a sustainable strategy. Wiley Edmister RO (1972) An empirical test of financial ratio analysis for small business failure prediction. J Financ Quant Anal 7(2):1477–1493 Frìas-Aceituno JV, Rodrìguez-Ariza L, Garcìa-Sànchez IM (2013) Is integrated reporting determined by a country’s legal system? An exploratory study. J Clean Prod 44:45–55 Holmen JS (1988) Using financial ratios to predict bankruptcy: an evaluation of classic models using recent evidence. Akron Bus Econ Rev 19(1):52–63 Moyer RC (1977) Forecasting financial failure: a re-examination. Financ Manag (pre-1986) 6(1):11 Ohlson JA (1980) Financial ratios and the probabilistic prediction of bankruptcy. J Account Res 18:109–131 Pollio M (2013) Dal decreto crescita le norme per evitare il fallimento. Amministrazione e finanza 1 Pozzoli M (2018) Integrated Reporting: principi generali e prassi applicative. Giappichelli Editore, Torino Pozzoli M, Paolone F (2017) Corporate financial distress: a study of the Italian manufacturing industry. Springer Quagli A, Teodori C (2005) L’informativa volontaria per settori di attività. FrancoAngeli, Milano Stubbs W, Higgins C (2014) Integrated reporting and internal mechanisms of change. Account Audit Account J 27(7):1068–1089 Van Bommel K (2014) Towards a legitimate compromise? An exploration of integrated reporting in the Netherlands. Account Audit Account J 27(7):1157–1189 Zmijewski ME (1984) Methodological issues related to the estimation of financial distress prediction models. J Account Res 22:59–82

Appendices

© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 F. Paolone, Accounting, Cash Flow and Value Relevance, SpringerBriefs in Accounting, https://doi.org/10.1007/978-3-030-50688-9

83

1.000

0.639

0.513

0.598

0.165

0.118

0.098

0.019

0.069

0.135

0.181

0.187

0.005

0.274

0.018

0.111

0.061

0.061

MVPS

BVPS

EPS

CFO

LnTA

LnSales

LnEmployees

DumAT

DumBE

DumDE

DumES

DumFR

DumIE

DumIT

DumNL

DumPT

DumFIN

DumNON_FIN

MVPS

0.152

0.152

0.082

0.115

0.223

0.035

0.233

0.178

0.156

0.078

0.011

0.167

0.198

0.289

0.723

0.453

1.000

BVPS

0.089

0.089

0.049

0.037

0.130

0.209

0.113

0.111

0.157

0.041

0.002

0.145

0.167

0.148

0.515

1.000

EPS

0.001

0.001

0.066

0.068

0.227

0.062

0.198

0.184

0.173

0.066

0.006

0.166

0.201

0.215

1.000

CFO

0.046

0.046

0.003

0.026

0.102

0.033

0.141

0.035

0.009

0.014

0.078

0.624

0.871

1.000

LnTA

0.123

0.123

0.021

0.022

0.147

0.033

0.113

0.014

0.073

0.028

0.106

0.759

1.000

0.194

0.194

0.065

0.007

0.225

0.036

0.184

0.016

0.054

0.025

0.060

1.000

0.026

0.026

0.024

0.067

0.057

0.054

0.104

0.065

0.114

0.039

1.000

0.028

0.028

0.026

0.020

0.020

0.076

0.216

0.216

0.073 0.073

0.173

0.335

0.209

1.000

0.059

0.114

0.071

0.125

1.000

0.048

0.048

0.043

0.123

0.123

0.098

0.191

1.000

0.141

0.141

0.070

0.197

0.197

0.158

1.000

0.039

0.039

0.036

0.101

0.101

1.000

LnSales LnEmp1 DumAT DumBE DumDE DumES DumFR DumIE

A.1 Correlation Matrix on EU Companies

0.049

0.049

0.045

0.127

1.000

DumIT

0.049

0.049

0.045

1.000

0.017

0.017

1.000 1.000

1.000 1.000

DumNL DumPT DumFIN DumNON_FIN

84 Appendices

MVPS BVPS EPS CFO LnTA LnSales LnEmployees DummyFIN DummyNON_FIN

MVPS 1.0000 0.3862 0.5473 0.0727 0.1972 0.1912 0.2419 0.0569 0.0569

1.0000 0.4222 0.0586 0.1167 0.0841 0.0212 0.0316 0.0316

BVPS

1.0000 0.2108 0.0381 0.1215 0.0648 0.0065 0.0065

EPS

1.0000 0.0997 0.0510 0.0504 0.0300 0.0300

CFO

A.2 Correlation Matrix on US Companies

1.0000 0.7231 0.3523 0.0047 0.0047

LnTA

1.0000 0.5275 0.0487 0.0487

LnSales

1.0000 0.0232 0.0232

LnEmployees

1.0000 1.0000

DummyFIN

1.0000

DummyNON_FIN

Appendices 85

86

Appendices

B.1 VIF Test on EU Companies Variable DummyDE DummyFR DummyNL DummyIT DummyES LnSales DummyIE LnTA DummyBE DummyAT LnEmployees BVPS CFO EPS DummyFIN Mean VIF

VIF 13.75 12.77 7.37 7.29 7.03 6.93 5.46 5.27 3.53 3.14 2.62 2.48 2.45 1.5 1.25 5.52

1/VIF 0.0727 0.0782 0.1356 0.1371 0.1422 0.1443 0.183 0.1898 0.2834 0.3186 0.3822 0.4032 0.4074 0.6684 0.7997

VIF 2.61 2.16 1.4 1.34 1.28 1.09 1.05 1.55

1/VIF 0.3836 0.463 0.7137 0.7474 0.7814 0.9183 0.9915

B.2 VIF Test on US Companies Variable LnSales LnTA LnEmployees EPS BVPS CFO DummyFIN Mean VIF

Appendices

C.1 Scatter Plot Graphs with MVPS (Dependent Variable) and BVPS, EPS, and CFO (EU Companies)

87

88

Appendices

C.2 Scatter Plot Graphs with MVPS (Dependent Variable) and BVPS, EPS, and CFO (US Companies)

Appendices

89

D.1 List of EU Companies Included in the Analysis #

21 22

Company Daimler AG TOTAL S.A. FIAT CHRYSLER AUTOMOBILES N.V. BAYERISCHE MOTOREN WERKE AG SIEMENS AG CARREFOUR SA ENI S.P.A. DEUTSCHE TELEKOM AG ELECTRICITE DE FRANCE SA ENEL SPA PEUGEOT S.A. BASF SE AIRBUS SE DEUTSCHE POST AG KONINKLIJKE AHOLD DELHAIZE N.V. RENAULT REPSOL S.A. TELEFONICA SA RWE AG ANHEUSER-BUSCH INBEV SA/NV CONTINENTAL AG VINCI

23

THYSSENKRUPP AG

DE

24

CASINO GUICHARDPERRACHON SA ORANGE COMPAGNIE DE SAINT GOBAIN SA BAYER AG BOUYGUES SA

FR

Tires and inner tubes General building contractors-nonresidential buildings Steel works, blast furnaces, and rolling and finishing Grocery stores

FR FR

Telephone communications Flat glass

DE FR

METRO AG ACS ACTIVIDADES DE CONSTRUCCION Y SERVICIOS, S.A. SANOFI

DE ES

Drugs Heavy construction, except highway and street construction Electrical goods wholesale dealing in General building contractors-nonresidential buildings

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

25 26 27 28 29 30

31

Country DE FR NL

Industry Motor vehicles and motor vehicle equipment Crude petroleum and natural gas Motor vehicles and motor vehicle equipment

DE

Motor vehicles and motor vehicle equipment

DE FR IT DE FR

Engines and turbines Grocery stores Crude petroleum and natural gas Telephone communications Electric services

IT FR DE NL DE NL

Electric services Motor vehicles and motor vehicle equipment Miscellaneous chemical products Aircraft and parts United States postal service Grocery stores

FR ES ES DE BE

Motor vehicles and motor vehicle equipment Crude petroleum and natural gas Telephone communications Electric services Beverages

DE FR

FR

Drugs (continued)

90 #

Appendices

33 34

Company DEUTSCHE LUFTHANSA AG IBERDROLA, S.A. INNOGY SE

ES DE

35

FRESENIUS SE & CO. KGAA

DE

36

LYONDELLBASELL INDUSTRIES N.V. E.ON SE CNH INDUSTRIAL N.V.

NL

JOHNSON CONTROLS INTERNATIONAL PLC AIR FRANCE - KLM

IE

32

37 38 39 40 41

Country DE

DE NL

FR

Electric services Construction, mining, and materials handling machinery and equipment Heating equipment, except electric and warm air, and plumbing fixtures Air transportation, scheduled and air courier services Concrete, gypsum, and plaster products

49

CRH PUBLIC LIMITED COMPANY MEDTRONIC PUBLIC LIMITED COMPANY INDUSTRIA DE DISEÑO TEXTIL SA VEOLIA ENVIRONNEMENT SCHNEIDER ELECTRIC SE DANONE S.A. NATURGY ENERGY GROUP, S.A. INTERNATIONAL CONSOLIDATED AIRLINES GROUP S.A. HOCHTIEF AG

50

BOLLORE

FR

51

OMV AKTIENGESELLSCHAFT HEINEKEN NV HEINEKEN HOLDING NV CECONOMY AG COMPAGNIE GEN DES ETABLISSEMENTS MICHELIN SCA SAFRAN S.A. ENBW ENERGIE BADENWÜRTTEMBERG AG L'AIR LIQUIDE SOCIETE ANONYME POUR L'ETUDE SODEXO

AT

Highway and street construction, except elevated highways Miscellaneous services incidental to transportation Crude petroleum and natural gas

NL NL DE FR

Beverages Beverages Department stores Tires and inner tubes

FR DE

Aircraft and parts Electric services

FR

Industrial inorganic chemicals

FR

Eating and drinking places

42 43 44 45 46 47 48

52 53 54 55

56 57 58 59

IE

Industry Air transportation, scheduled and air courier services Electric services Combination electric and gas, and other utility services Surgical, medical, and dental instruments and supplies Industrial organic chemicals

IE ES FR FR FR ES

Surgical, medical, and dental instruments and supplies Men’s and boys’ furnishings, work clothing, and allied garments Water supply Electrical industrial apparatus Dairy products Gas production and distribution

ES

Air transportation, scheduled and air courier services

DE

(continued)

Appendices #

91

60 61

Company ENDESA, S.A. HENKEL AG & CO. KGAA

Country ES DE

62

TELECOM ITALIA S.P.A.

IT

63 64 65

TUI AG VALEO SA EATON CORPORATION PLC

DE FR IE

66 67 68 69 70

DE NL FR FR PT

71

HEIDELBERGCEMENT AG KONINKLIJKE PHILIPS N.V. FAURECIA SUEZ S.A. GALP ENERGIA, S.G.P.S., S. A. EIFFAGE

72

BAYWA AG

DE

73 74

FR PT

75 76 77 78 79

THALES SA EDP - ENERGIAS DE PORTUGAL, S.A. MERCK KGAA EVONIK INDUSTRIES AG COVESTRO AG SCHAEFFLER AG VIVENDI

80 81 82

N.V. UMICORE S.A. ALLERGAN PLC INGERSOLL-RAND PLC

BE IE IE

83 84 85 86 87 88

REXEL S.A. SOLVAY SA AKZO NOBEL NV LEONARDO S.P.A. BRENNTAG AG FERROVIAL, S.A.

FR BE NL IT DE ES

89

MAN SE

DE

90

ATOS SE

FR

91

HAPAG-LLOYD AG

DE

FR

DE DE DE DE FR

Industry Electric services Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations Communications services, not elsewhere specified Arrangement of passenger transportation Motor vehicles and motor vehicle equipment Electric transmission and distribution equipment Cement, hydraulic Household appliances Motor vehicles and motor vehicle equipment Water supply Oil and gas field services General building contractors-nonresidential buildings Machinery, equipment, and supplies wholesale dealing in Communications equipment Electric services Drugs Miscellaneous chemical products Industrial organic chemicals Motor vehicles and motor vehicle equipment Communications services, not elsewhere specified Copper ores Drugs Laboratory apparatus and analytical, optical, measuring, and controlling instruments Electrical goods wholesale dealing in Drugs Drugs Aircraft and parts Miscellaneous chemical products Heavy construction, except highway and street construction Miscellaneous industrial and commercial machinery and equipment Computer programming, data processing, and other computer-related services Deep sea domestic transportation of freight (continued)

92 #

Appendices

92 93

Company ASML HOLDING N.V. ESSILORLUXOTTICA

Country NL FR

94 95

AURUBIS AG LANXESS AG

DE DE

96

SARAS S.P.A. - RAFFINERIE SARDE PRYSMIAN S.P.A. MYLAN N.V. PUBLICIS GROUPE SA SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY COMPANIA DE DISTRIBUCION INTEGRAL LOGISTA SALZGITTER AG

IT

Industry Electronic components and accessories Laboratory apparatus and analytical, optical, measuring, and controlling instruments Copper ores Plastics materials and synthetic resins, synthetic rubber, cellulosic, and other manmade fibers, except glass Petroleum refining

IT NL FR IE

Communications equipment Drugs Advertising Computer and office equipment

ES

Miscellaneous personal services

DE

Steel works, blast furnaces, and rolling and finishing Miscellaneous chemical products Aircraft and parts

97 98 99 100

101

102 103 104 105 106 107

108

KONINKLIJKE DSM N.V. SIEMENS GAMESA RENEWABLE ENERGY, S.A. PERNOD RICARD SA SMURFIT KAPPA GROUP PLC ARKEMA

NL ES FR IE

ES

Beverages Converted paper and paperboard products, except containers and boxes Plastics materials and synthetic resins, synthetic rubber, cellulosic, and other manmade fibers, except glass Motor vehicles and motor vehicle equipment

NL

Electronic components and accessories

DE DE

Trucking and courier services, except air Electronic components and accessories

ES

General building contractors-residential buildings Miscellaneous services incidental to transportation Miscellaneous plastics products Electrical goods wholesale dealing in Books Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations

FR

112

GESTAMP AUTOMOCION, S.A. STMICROELECTRONICS N. V. KION GROUP AG INFINEON TECHNOLOGIES AG ACCIONA S.A.

113

ATLANTIA S.P.A.

IT

114 115 116 117

PLASTIC OMNIUM SA FNAC DARTY LAGARDERE SCA BEIERSDORF AG

FR FR FR DE

109 110 111

(continued)

Appendices # 118

93

122 123

Company DISTRIBUIDORA INTERNACIONAL DE ALIMENTACION TELEFONICA DEUTSCHLAND HOLDING AG HELLA GMBH & CO. KGAA KONINKLIJKE BAM GROEP NV SEB S.A. SPIE SA

FR FR

124

KLÖCKNER & CO SE

DE

125 126

ELIOR GROUP HERA SPA

FR IT

127

IE

131

KERRY GROUP PUBLIC LIMITED COMPANY SIGNIFY N.V. RHEINMETALL AG FOMENTO DE CONSTRUCCIONES Y CONTRATAS SA ANDRITZ AG

AT

132

KONINKLIJKE KPN NV

NL

133 134

FR NL

135

LEGRAND SA KONINKLIJKE VOLKERWESSELS N.V. PROXIMUS SA

136 137 138

CONSTELLIUM N.V. PIRELLI & C. S.P.A. SALINI IMPREGILO S.P.A.

NL IT IT

139

IMERYS SA

FR

140 141 142 143

FINCANTIERI S.P.A ZALANDO SE AUTOGRILL S.P.A. UNITED INTERNET AG

IT DE IT DE

144

LEONI AG

DE

145

ACERINOX, S.A.

ES

119 120 121

128 129 130

Country ES

Industry Grocery stores

DE

Communications services, not elsewhere specified Electric lighting and wiring equipment General building contractors-residential buildings Household appliances Engineering, architectural, and surveying services Metals and minerals, except petroleum wholesale dealing in Eating and drinking places Combination electric and gas, and other utility services Miscellaneous food preparations and kindred products Electric lighting and wiring equipment Motor vehicles and motor vehicle equipment Highway and street construction, except elevated highways

DE NL

NL DE ES

BE

Special industry machinery, except metalworking machinery Communications services, not elsewhere specified Electronic components and accessories Heavy construction, except highway and street construction Communications services, not elsewhere specified Nonferrous foundries (castings) Tires and inner tubes Heavy construction, except highway and street construction Miscellaneous nonmetallic minerals, except fuels Ship and boat building and repairing Family clothing stores Eating and drinking places Computer programming, data processing, and other related services Steel works, blast furnaces, and rolling and finishing Steel works, blast furnaces, and rolling and finishing (continued)

94 # 146 147

Appendices Country DE IE

Industry Electronic components and accessories Oil and gas field services

148

Company WACKER CHEMIE AG WEATHERFORD INTERNATIONAL PLC ILIAD

FR

149

GEA GROUP AG

DE

150 151 152 153 154

FR FR BE ES BE

155 156

SAVENCIA SA EURAZEO UCB S.A. GRIFOLS, S.A. ACKERMANS EN VAN HAAREN NV/SA TELEKOM AUSTRIA AG NEXANS SA

AT FR

157 158

TÉCNICAS REUNIDAS, SA BEKAERT SA/NV

ES BE

159

IE

160

KINGSPAN GROUP PUBLIC LIMITED COMPANY BECHTLE AG

Computer programming, data processing, and other related services Engineering, architectural, and surveying services Dairy products Holding offices Drugs Drugs Heavy construction, except highway and street construction Telephone communications Rolling, drawing, and extruding of nonferrous metals Crude petroleum and natural gas Steel works, blast furnaces, and rolling and finishing Fabricated structural metal products

161

AENA, S.M.E., S.A.

ES

162

WOLTERS KLUWER NV

NL

163 164 165

TECHNICOLOR OSRAM LICHT AG BILFINGER SE

FR DE DE

166 167

DE IE DE

Agricultural chemicals

DE DE ES

Radio and television broadcasting stations Electric services Miscellaneous business services

172 173

VONOVIA SE PERRIGO COMPANY PUBLIC LIMITED COMPANY K+S AKTIENGESELLSCHAFT PROSIEBENSAT.1 MEDIA SE MVV ENERGIE AG PROSEGUR COMPANIA DE SEGURIDAD S.A. NEXITY SA VALLOUREC S.A.

Computer programming, data processing, and other related services Airports, flying fields, and airport terminal services Computer programming, data processing, and other related services Communications equipment Electric lighting and wiring equipment Heavy construction, except highway and street construction Real estate agents and managers Drugs

FR FR

174 175

KRONES AG DÜRR AG

Real estate agents and managers Steel works, blast furnaces, and rolling and finishing General industrial machinery and equipment Special industry machinery, except metalworking machinery

168 169 170 171

DE

DE DE

(continued)

Appendices

95

# 176 177

Company BPOST JUNGHEINRICH AG

Country BE DE

178

BE

179 180

COMPAGNIE D'ENTREPRISES CFE SA ERAMET TOTAL PRODUCE PLC

181 182

GRANDVISION N.V 1&1 DRILLISCH AG

NL DE

183

MAIRE TECNIMONT S.P.A.

IT

184 185 186

FR NL DE

188 189 190 191

ACCOR SA POSTNL N.V. FRAPORT AG FRANKFURT AIRPORT SERVICES AURELIUS EQUITY OPPORTUNITIES SE & CO. KGAA FERRARI N.V. MEDIASET S.P.A. WIENERBERGER AG KORIAN

192

AXEL SPRINGER SE

DE

193 194

DE IE

195

KUKA AG GRAFTON GROUP PUBLIC LIMITED COMPANY ARCADIS NV

196 197 198 199 200 201

ELIS S.A. SYMRISE AG JCDECAUX SA CIE AUTOMOTIVE S.A. PRADA SPA INDRA SISTEMAS SA

FR DE FR ES IT ES

202 203

ACEA SPA ALTRAN TECHNOLOGIES SA OBRASCON HUARTE LAIN S.A. SIXT SE

IT FR

187

204 205

FR IE

DE NL IT AT FR

NL

ES DE

Industry Trucking and courier services, except air Miscellaneous services incidental to transportation General building contractors-nonresidential buildings Ferroalloy ores, except vanadium Groceries and related products wholesale dealing in Retail stores, not elsewhere classified Communications services, not elsewhere specified Engineering, architectural, and surveying services Hotels and motels United States postal service Airports, flying fields, and airport terminal services Miscellaneous business services Motor vehicles and motor vehicle equipment Cable and other pay television services Concrete, gypsum, and plaster products Miscellaneous health and allied services, not elsewhere classified Newspapers: publishing or publishing and printing General industrial machinery and equipment Lumber and other building materials dealers Engineering, architectural, and surveying services Management and public relations services Miscellaneous chemical products Advertising Metal forgings and stampings Leather goods, not elsewhere specified Computer programming, data processing, and other related services Electric services Computer programming, data processing, and other related services Highway and street construction, except elevated highways Automotive rental and leasing, without drivers (continued)

96

Appendices

# 206

Company FREENET AG

Country DE

207

GEMALTO N.V.

NL

208

DERICHEBOURG

FR

209 210

BUZZI UNICEM S.P.A. GREENCORE GROUP PUBLIC LIMITED COMPANY MOTA-ENGIL SGPS S.A.

IT IE

OCI N.V VERBUND AG COFIDE - GRUPPO DE BENEDETTI S.P.A. CIR S.P.A. - COMPAGNIE INDUSTRIALI RIUNITE BONDUELLE SCA

NL AT IT

211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234

TARKETT S.A. MALLINCKRODT PUBLIC LIMITED COMPANY AALBERTS INDUSTRIES N. V. HUGO BOSS AG DANIELI & C. OFFICINE MECCANICHE SPA SLIGRO FOOD GROUP N.V. DMG MORI AG BREMBO SPA INGENICO GROUP SA VICAT DRÄGERWERK AG & CO. KGAA PENTAIR PLC SNAM S.P.A. FUCHS PETROLUB SE KONINKLIJKE BOSKALIS WESTMINSTER NV ENDO INTERNATIONAL PLC TELENET GROUP HOLDING NV NORDEX SE

FR IE

Industry Communications services, not elsewhere specified Computer programming, data processing, and other related services Airports, flying fields, and airport terminal services Cement, hydraulic Miscellaneous food preparations and kindred products Highway and street construction, except elevated highways Agricultural chemicals Electric services Newspapers: publishing or publishing and printing Newspapers: publishing or publishing and printing Canned, frozen and preserved fruits, vegetables, and food Carpentry and floor work Drugs

NL

Miscellaneous fabricated metal products

DE IT

Men's and boys' suits, coats, and overcoats Metalworking machinery and equipment

NL

Groceries and related products wholesale dealing in Metalworking machinery and equipment Motor vehicles and motor vehicle equipment Computer and office equipment Cement, hydraulic Laboratory apparatus and analytical, optical, measuring, and controlling instruments Miscellaneous fabricated metal products Pipelines, except natural gas Miscellaneous products of petroleum and coal Heavy construction, except highway and street construction Drugs

PT

IT FR

DE IT FR FR DE IE IT DE NL IE BE DE

Communications services, not elsewhere specified Electric services (continued)

Appendices # 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249

250

251 252 253

254 255 256 257 258 259 260 261 262 263 264 265

Company BIOMERIEUX SA TELEVISION FRANCAISE 1 SA STADA ARZNEIMITTEL AG FORFARMERS N.V. ALLEGION PUBLIC LIMITED COMPANY IMCD N.V. IPSEN SA GLANBIA PUBLIC LIMITED COMPANY TRIGANO ELECNOR SA TERNA S.P.A. - RETE ELETTRICA NAZIONALE CIMPRESS N.V. ONTEX GROUP AGFA GEVAERT NV SOCIEDADE DE INVESTIMENTO E GESTAO, SGPS, SA LENZING AG

EVN AG DE LONGHI SPA CONSTRUCCIONES Y AUXILIAR DE FERROCARRILES, S.A. ÖSTERREICHISCHE POST AKTIENGESELLSCHAFT APPLEGREEN PLC RED ELÉCTRICA CORPORACION, S.A. BIC SA EDP RENOVAVEIS, S.A. MANITOU BF SA GRAMMER AG MELIA HOTELS INTERNATIONAL, S.A. ICADE DEUTZ AG ELRINGKLINGER AG PROSEGUR CASH, S.A.

97 Country FR FR

Industry Drugs Radio and television broadcasting stations

DE NL IE

Drugs Animal specialities Miscellaneous business services

NL FR IE

Miscellaneous chemical products Drugs Dairy products

FR ES IT

Motor vehicles and motor vehicle equipment Electric services Electric services

NL BE BE PT

Commercial printing Retail stores, not elsewhere classified Photographic equipment and supplies Cement, hydraulic

AT

AT IT ES

Plastics materials and synthetic resins, synthetic rubber, cellulosic, and other manmade fibers, except glass Electric services Household appliances Railroad equipment

AT

Trucking and courier services, except air

IE ES

Gasoline service stations Electric services

FR ES FR DE ES

Pens, pencils, and other artists' materials Electric services Construction, mining, and materials handling machinery and equipment Motor vehicles and motor vehicle equipment Hotels and motels

FR DE DE ES

Real estate agents and managers Engines and turbines Motor vehicles and motor vehicle equipment Miscellaneous business services (continued)

98

Appendices

# 266

Company INDUS HOLDING AG

Country DE

267 268

WORLDLINE WACKER NEUSON SE

FR DE

269

IT

270

DAVIDE CAMPARI MILANO S.P.A. LISI

271 272 273

APPLUS SERVICES, S.A. ORIGIN ENTERPRISES PLC MARR SPA

ES IE IT

274

FUGRO NV

NL

275

IE

276 277

JAZZ PHARMACEUTICALS PLC STRÖER SE & CO. KGAA TKH GROUP N.V.

278

PALFINGER AG

AT

279 280 281 282

SOGEFI S.P.A. TESSENDERLO GROUP NV NH HOTEL GROUP, S.A. SARTORIUS AG

IT BE ES DE

283

DE

284 285

BAUER AKTIENGESELLSCHAFT NOS, SGPS, S.A. KTM INDUSTRIES AG

286 287

IMMSI SPA HEIJMANS NV

IT NL

288 289

SBM OFFSHORE N.V. METROPOLE TELEVISION SA KAUFMAN & BROAD SA CALTAGIRONE SPA I.M.A. INDUSTRIA MACCHINE AUTOMATICHE S.P.A. MASMOVIL IBERCOM, S.A.

NL FR

Advertising Rolling, drawing, and extruding of nonferrous metals Construction, mining, and materials handling machinery and equipment Motor vehicles and motor vehicle equipment Industrial inorganic chemicals Hotels and motels Miscellaneous industrial and commercial machinery and equipment Construction, mining, and materials handling machinery and equipment Cable and other pay television services Computer programming, data processing, and other computer-related services Motorcycles, bicycles, and parts General building contractors-residential buildings Oil and gas field services Radio and television broadcasting stations

FR IT IT

Real estate agents and managers Cement, hydraulic General industrial machinery and equipment

ES

Computer programming, data processing, and other computer-related services

290 291 292

293

FR

DE NL

PT AT

Industry Construction, mining, and materials handling machinery and equipment Functions related to depository banking Construction, mining, and materials handling machinery and equipment Beverages Costume jewelry and costume novelties, buttons, and miscellaneous notions, except precious metal Research, development, and testing services Farm labor and management services Groceries and related products wholesale dealing in Engineering, architectural, and surveying services Drugs

(continued)

Appendices

99

# 294 295 296 297 298 299 300

Company PIERRE ET VACANCES SA SILTRONIC AG DEUTSCHE WOHNEN SE PIAGGIO & C. S.P.A. SESA S.P.A. AMS AG CODERE S.A.

Country FR DE DE IT IT AT ES

301

EUTELSAT COMMUNICATIONS SA SAMSE SA MONCLER S.P.A. RHÖN-KLINIKUM AG GERRESHEIMER AG COVIVIO S.A. CANCOM SE

FR

302 303 304 305 306 307 308 309

FR IT DE DE FR DE

316 317

VILMORIN & CIE SALVATORE FERRAGAMO S.P.A. RECORDATI S.P.A. ZOOPLUS AG ENAGAS, S.A. UDG HEALTHCARE PUBLIC LIMITED COMPANY LECHWERKE AG HAMBURGER HAFEN UND LOGISTIK AG BENETEAU SA QIAGEN NV

318 319

INTERPUMP GROUP SPA CARL ZEISS MEDITEC AG

IT DE

320

HELLOFRESH SE

DE

310 311 312 313 314 315

FR IT IT DE ES IE DE DE FR NL

Industry Rooming and boarding houses Electronic components and accessories Real estate agents and managers Motorcycles, bicycles, and parts Miscellaneous investing Electronic components and accessories Miscellaneous amusement and recreation services Communications services, not elsewhere specified Home furniture and furnishings stores Miscellaneous apparel and accessories Offices and clinics of doctors of medicine Glass and glassware, pressed or blown Real estate agents and managers Computer programming, data processing, and other computer-related services Vegetables and melons Footwear, except rubber Drugs Retail stores, not elsewhere classified Gas production and distribution Drugs, drug proprietaries, and druggists' sundries wholesale dealing in Electric services Services incidental to water transportation Ship and boat building and repairing Laboratory apparatus and analytical, optical, measuring, and controlling instruments General industrial machinery and equipment Laboratory apparatus and analytical, optical, measuring, and controlling instruments Canned, frozen and preserved fruits, vegetables, and food specialities

100

Appendices

D.2 List of US Companies Included in the Analysis # 1 2 3 4 5 6

Company WALMART INC. AMAZON.COM, INC. EXXON MOBIL CORP APPLE INC. CVS HEALTH CORPORATION MCKESSON CORPORATION

7 8

AT&T INC. AMERISOURCEBERGEN CORP

9

ALPHABET INC.

10 11 12

FORD MOTOR CO COSTCO WHOLESALE CORP CARDINAL HEALTH, INC.

13 14 15

CHEVRON CORPORATION GENERAL MOTORS COMPANY WALGREENS BOOTS ALLIANCE, INC. VERIZON COMMUNICATIONS INC. MICROSOFT CORPORATION

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

MARATHON PETROLEUM CORPORATION KROGER CO VALERO ENERGY CORP JPMORGAN CHASE & CO COMCAST CORPORATION HOME DEPOT, INC. PHILLIPS 66 GENERAL ELECTRIC COMPANY DELL TECHNOLOGIES INC. BANK of AMERICA CORPORATION WELLS FARGO & COMPANY ANTHEM, INC. BOEING COMPANY (THE) JOHNSON & JOHNSON INTERNATIONAL BUSINESS MACHINES CORP

Industry Variety stores Miscellaneous shopping goods stores Petroleum refining Computer and office equipment Drug stores and proprietary stores Drugs, drug proprietaries, and druggists' sundries wholesale dealing in Telephone communications Drugs, drug proprietaries, and druggists' sundries wholesale dealing in Computer programming, data processing, and other computer-related services Motor vehicles and motor vehicle equipment Variety stores Drugs, drug proprietaries, and druggists' sundries wholesale dealing in Petroleum refining Motor vehicles and motor vehicle equipment Drug stores and proprietary stores Telephone communications Computer programming, data processing, and other computer-related services Petroleum refining Grocery stores Petroleum refining Holding offices Telephone communications Lumber and other building materials dealers Petroleum refining Engines and turbines Computer and office equipment Holding offices Holding offices Insurance carriers Aircraft and parts Drugs Computer programming, data processing, and other computer-related services (continued)

Appendices #

37 38 39

Company UNITED TECHNOLOGIES CORPORATION TARGET CORP CITIGROUP INC. UNITED PARCEL SERVICE, INC. INTEL CORP LOWE'S COMPANIES, INC. FACEBOOK, INC.

40

FEDEX CORP

41

WALT DISNEY COMPANY (THE) PROCTER & GAMBLE CO

33 34 35 36

42 43 44 45 46 47 48 49 50

PEPSICO, INC. ARCHER DANIELS MIDLAND COMPANY BERKSHIRE HATHAWAY INC. SYSCO CORP LOCKHEED MARTIN CORP HP INC. ENERGY TRANSFER LP CATERPILLAR INC.

51 52 53 54

CISCO SYSTEMS, INC. PFIZER INC. HCA HEALTHCARE, INC. DELTA AIR LINES, INC.

55 56

61

METLIFE, INC. AMERICAN AIRLINES GROUP INC. CHARTER COMMUNICATIONS, INC. T-MOBILE US, INC. AMERICAN EXPRESS COMPANY UNITED AIRLINES HOLDINGS, INC. DOW INC.

62

BEST BUY CO, INC.

57 58 59 60

101 Industry Aircraft and parts Variety stores Holding offices Trucking and courier services, except air Electronic components and accessories Lumber and other building materials dealers Computer programming, data processing, and other computer-related services Air transportation, scheduled and air courier services Radio and television broadcasting stations Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations Beverages Grain mill products Insurance carriers Groceries and related products wholesale dealing in Aircraft and parts Computer and office equipment Gas production and distribution Construction, mining, and materials handling machinery and equipment Communications equipment Drugs Hospitals Air transportation, scheduled and air courier services Insurance carriers Air transportation, scheduled and air courier services Cable and other pay television services Telephone communications Holding offices Air transportation, scheduled and air courier services Plastics materials and synthetic resins, synthetic rubber, cellulosic, and other manmade fibers, except glass Radio, television, consumer electronics, and music stores (continued)

102 #

Appendices

63 64 65 66

Company TYSON FOODS, INC. MERCK & CO., INC. MORGAN STANLEY WORLD FUEL SERVICES CORP

67

ORACLE CORP

68

GENERAL DYNAMICS CORP

69 70 71 72 73

DEERE & CO NIKE, INC. TJX COMPANIES, INC. THE ALLSTATE CORP. AMERICAN INTERNATIONAL GROUP, INC. PRUDENTIAL FINANCIAL, INC. COCA-COLA COMPANY (THE) TECH DATA CORP

74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

GOLDMAN SACHS GROUP, INC. HONEYWELL INTERNATIONAL INC. ENTERPRISE PRODUCTS PARTNERS L P PUBLIX SUPER MARKETS, INC. EXELON CORPORATION PLAINS ALL AMERICAN PIPELINE LP NORTHROP GRUMMAN CORPORATION PROGRESSIVE CORP PLAINS GP HOLDINGS, L.P. SPRINT CORPORATION ABBVIE INC. INTL FCSTONE INC. CONOCOPHILLIPS 3M COMPANY ABBOTT LABORATORIES CHS INC. PHILIP MORRIS INTERNATIONAL INC. TRAVELERS COMPANIES INC.

Industry Meat products Drugs Holding offices Petroleum and petroleum products wholesale dealing in Computer programming, data processing, and other computer-related services Search, detection, navigation, guidance, aeronautical and nautical systems and instruments Farm and garden machinery and equipment Rubber and plastics footwear Family clothing stores Insurance carriers Insurance carriers Insurance carriers Beverages Professional and commercial equipment and supplies wholesale dealing in Holding offices Motor vehicles and motor vehicle equipment Gas production and distribution Grocery stores Combination electric and gas, and other utility services Pipelines, except natural gas Search, detection, navigation, guidance, aeronautical and nautical systems, and instruments Insurance carriers Pipelines, except natural gas Telephone communications Drugs Commercial banks Petroleum refining Abrasive, asbestos, and miscellaneous nonmetallic mineral products Drugs Farm labor and management services Cigarettes Insurance carriers (continued)

Appendices # 95 96

Company RAYTHEON COMPANY

114

HEWLETT PACKARD ENTERPRISE COMPANY ARROW ELECTRONICS, INC. CAPITAL ONE FINANCIAL CORPORATION STARBUCKS CORP BRISTOL-MYERS SQUIBB COMPANY US FOODS HOLDING CORP. MONDELEZ INTERNATIONAL, INC. MACY'S, INC. DOLLAR GENERAL CORP PACCAR INC JABIL INC. ALTRIA GROUP, INC. DUKE ENERGY CORPORATION NUCOR CORP KRAFT HEINZ COMPANY (THE) TESLA, INC. PBF ENERGY INC. THERMO FISHER SCIENTIFIC INC. NGL ENERGY PARTNERS LP

115

BAKER HUGHES COMPANY

116

SYNNEX CORPORATION

117 118 119 120 121 122 123 124

CUMMINS INC. CENTURYLINK, INC. MICRON TECHNOLOGY, INC. AMGEN INCORPORATED VISA INC. US BANCORP DOLLAR TREE, INC. PENSKE AUTOMOTIVE GROUP, INC. BROADCOM INC. SOUTHWEST AIRLINES CO.

97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113

125 126

103 Industry Search, detection, navigation, guidance, aeronautical and nautical systems, and instruments Computer and office equipment Electrical goods wholesale dealing in Holding offices Eating and drinking places Drugs Groceries and related products wholesale dealing in Dairy products Department stores Variety stores Motor vehicles and motor vehicle equipment Electronic components and accessories Cigarettes Combination electric and gas, and other utility services Steel works, blast furnaces, and rolling and finishing Canned, frozen and preserved fruits, vegetables, and food specialities Motor vehicles and motor vehicle equipment Petroleum refining Laboratory apparatus and analytical, optical, measuring, and controlling instruments Petroleum and petroleum products wholesale dealing in Construction, mining, and materials handling machinery and equipment Professional and commercial equipment and supplies wholesale dealing in Engines and turbines Telephone communications Electronic components and accessories Drugs Business credit institutions Holding offices Variety stores Motor vehicle dealers (new and used) Electronic components and accessories Air transportation, scheduled and air courier services (continued)

104 # 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154

Appendices Company HALLIBURTON CO INTERNATIONAL PAPER CO ELI LILLY AND COMPANY LENNAR CORP GILEAD SCIENCES, INC. MANPOWERGROUP INC. UNION PACIFIC CORP RITE AID CORP DUPONT DE NEMOURS, INC. SOUTHERN CO UNITED NATURAL FOODS, INC. CBRE GROUP, INC. AUTONATION, INC. MCDONALD'S CORPORATION MARRIOTT INTERNATIONAL, INC. DXC TECHNOLOGY COMPANY WHIRLPOOL CORP KOHLS CORPORATION AECOM NETFLIX, INC. LEAR CORP PERFORMANCE FOOD GROUP COMPANY QUALCOMM INC AVNET, INC. GENUINE PARTS CO

155

NEXTERA ENERGY, INC. FLUOR CORP FEDERAL NATIONAL MORTGAGE ASSOCIATION KIMBERLY CLARK CORP

156

EMERSON ELECTRIC CO

157 158 159 160

TENET HEALTHCARE CORP WESTROCK COMPANY CARMAX, INC. PNC FINANCIAL SERVICES GROUP, INC. PAYPAL HOLDINGS, INC.

161

Industry Oil and gas field services Paper mills Drugs Operative builders Drugs Personnel supply services Railroads Drug stores and proprietary stores Miscellaneous chemical products Electric services Groceries and related products wholesale dealing in Real estate agents and managers Motor vehicle dealers (new and used) Eating and drinking places Hotels and motels Computer programming, data processing, and other computer-related services Household appliances Department stores Engineering, architectural, and surveying services Video tape rental Motor vehicles and motor vehicle equipment Groceries and related products wholesale dealing in Communications equipment Electrical goods wholesale dealing in Motor vehicles and motor vehicle parts and supplies wholesale dealing in Electric services Engineering, architectural, and surveying services Federal and federally sponsored credit agencies Converted paper and paperboard products, except containers and boxes Laboratory apparatus and analytical, optical, measuring, and controlling instruments Hospitals Paperboard containers and boxes Motor vehicle dealers (used only) Holding offices Functions related to depository banking (continued)

Appendices # 162

167

Company OCCIDENTAL PETROLEUM CORPORATION D.R. HORTON, INC. SHERWIN WILLIAMS COMPANY (THE) HOLLYFRONTIER CORPORATION BECTON, DICKINSON AND COMPANY PG&E CORP

168 169

EOG RESOURCES, INC. DANAHER CORP

170

SUNOCO LP

171 172 173

MASTERCARD GENERAL MILLS, INC. COGNIZANT TECHNOLOGY SOLUTIONS CORP SEARS HOLDINGS CORPORATION MARSH & MCLENNAN COMPANIES, INC. XPO LOGISTICS, INC. GAP INC WESTERN DIGITAL CORP BANK of NEW YORK MELLON CORPORATION CORE-MARK HOLDING COMPANY, INC. JONES LANG LASALLE, INC. CDW CORP ARAMARK NORDSTROM, INC. COLGATE PALMOLIVE CO

163 164 165 166

174 175 176 177 178 179 180 181 182 183 184 185 186

189 190

AMERICAN ELECTRIC POWER COMPANY, INC. WASTE MANAGEMENT, INC. C.H. ROBINSON WORLDWIDE, INC. CELGENE CORP PPG INDUSTRIES, INC.

191

ROSS STORES, INC.

187 188

105 Industry Crude petroleum and natural gas Operative builders Paint, glass, and wallpaper stores Petroleum refining Surgical, medical, and dental instruments and supplies Combination electric and gas, and other utility services Crude petroleum and natural gas Laboratory apparatus and analytical, optical, measuring, and controlling instruments Petroleum and petroleum products wholesale dealing in Business credit institutions Grain mill products Computer programming, data processing, and other computer-related services Department stores Insurance agents, brokers, and service Trucking and courier services, except air Family clothing stores Computer and office equipment Holding offices Groceries and related products wholesale dealing in Real estate agents and managers Nonstore retailers Eating and drinking places Family clothing stores Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations Electric services Sanitary services Arrangement of transportation of freight and cargo Drugs Paints, varnishes, lacquers, enamels, and allied products Family clothing stores (continued)

106

Appendices

# 192 193

Company OMNICOM GROUP INC. STRYKER CORPORATION

194

197

ESTEE LAUDER COMPANIES INC. (THE) BLACKROCK, INC. GOODYEAR TIRE & RUBBER CO ECOLAB INC.

198

APPLIED MATERIALS, INC.

199 200 201

208

BOOKING HOLDINGS INC. VIACOMCBS INC. STANLEY BLACK & DECKER, INC. FREEPORT-MCMORAN INC. TEXAS INSTRUMENTS INC. BIOGEN INC. PARKER HANNIFIN CORP ARCONIC INC. AUTOMATIC DATA PROCESSING, INC. UBER TECHNOLOGIES, INC.

209 210

ILLINOIS TOOL WORKS INC. MURPHY USA INC.

211 212

FREDDIE MAC V. F. CORPORATION

213

CORTEVA, INC.

214 215 216 217 218 219 220

LAS VEGAS SANDS CORP. TEXTRON INC. KELLOGG COMPANY ALCOA CORPORATION DOMINION ENERGY, INC. SYNCHRONY FINANCIAL SALESFORCE.COM, INC.

221 222

L BRANDS, INC. COMMUNITY HEALTH SYSTEMS, INC. KINDER MORGAN, INC.

195 196

202 203 204 205 206 207

223

Industry Advertising Surgical, medical, and dental instruments and supplies Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations Business credit institutions Tires and inner tubes Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations Special industry machinery, except metalworking machinery Miscellaneous business services Radio and television broadcasting stations Metalworking machinery and equipment Copper ores Electronic components and accessories Drugs Miscellaneous fabricated metal products Primary smelting and refining of nonferrous metals Computer programming, data processing, and other computer-related services Computer programming, data processing, and other computer-related services General industrial machinery and equipment Combination electric and gas, and other utility services Mortgage bankers and brokers Men’s and boys’ furnishings, work clothing, and allied garments Miscellaneous nondurable goods wholesale dealing in Hotels and motels Aircraft and parts Grain mill products Primary smelting and refining of nonferrous metals Electric services Holding offices Computer programming, data processing, and other computer-related services Women’s clothing stores Hospitals Gas production and distribution (continued)

Appendices # 224

228

Company BJ'S WHOLESALE CLUB HOLDINGS, INC. UNITED STATES STEEL CORPORATION DISH NETWORK CORPORATION JACOBS ENGINEERING GROUP INC. GLOBAL PARTNERS LP

229 230 231 232

DTE ENERGY CO EDISON INTERNATIONAL ONEOK, INC. CONSOLIDATED EDISON, INC.

233

TRUIST FINANCIAL CORPORATION JEFFERIES FINANCIAL GROUP INC. LINCOLN NATIONAL CORP AMERIPRISE FINANCIAL, INC. EXPEDIA GROUP, INC. GROUP 1 AUTOMOTIVE, INC. BED BATH & BEYOND INC. J. C. PENNEY COMPANY, INC. CSX CORP CNA FINANCIAL CORP. LKQ CORPORATION

225 226 227

234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253

AUTOZONE, INC. STEEL DYNAMICS, INC. LITHIA MOTORS, INC. STATE STREET CORPORATION MGM RESORTS INTERNATIONAL TENNECO INC. CROWN HOLDINGS, INC. SEMPRA ENERGY

254

ICAHN ENTERPRISES L.P. RELIANCE STEEL & ALUMINUM CO XCEL ENERGY INC.

255

CORNING INC.

107 Industry Miscellaneous general merchandise stores Steel works, blast furnaces, and rolling and finishing Cable and other pay television services Highway and street construction, except elevated highways Petroleum and petroleum products wholesale dealing in Electric services Electric services Gas production and distribution Combination electric and gas, and other utility services Holding offices Holding offices Insurance carriers Holding offices Arrangement of passenger transportation Motor vehicle dealers (new and used) Home furniture and furnishings stores Department stores Railroads Insurance carriers Motor vehicles and motor vehicle parts and supplies wholesale dealing in Auto and home supply stores Steel works, blast furnaces, and rolling and finishing Motor vehicle dealers (new and used) Holding offices Hotels and motels Motor vehicles and motor vehicle equipment Metal cans and shipping containers Combination electric and gas, and other utility services Miscellaneous investing Metals and minerals, except petroleum wholesale dealing in Combination electric and gas, and other utility services Rolling, drawing, and extruding of nonferrous metals (continued)

108 # 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286

Appendices Company W.W. GRAINGER, INC. BALL CORP DISCOVER FINANCIAL SERVICES PILGRIM'S PRIDE CORPORATION DAVITA INC. REINSURANCE GROUP of AMERICA INC. FOX CORPORATION LABORATORY CORP OF AMERICA HOLDINGS NORFOLK SOUTHERN CORP NAVISTAR INTERNATIONAL CORP QUANTA SERVICES INC ADOBE INC. BAXTER INTERNATIONAL INC. LEIDOS HOLDINGS, INC. IQVIA HOLDINGS INC. FIRSTENERGY CORPORATION OFFICE DEPOT, INC. NVIDIA CORP ENTERGY CORP EBAY INC. LIVE NATION ENTERTAINMENT, INC. UNIVERSAL HEALTH SERVICES, INC. CHARLES SCHWAB CORPORATION AES CORPORATION (THE) CENTERPOINT ENERGY, INC. MOLSON COORS BEVERAGE COMPANY DISCOVERY, INC. QURATE RETAIL, INC. FIDELITY NATIONAL INFORMATION SERVICES, INC. REPUBLIC SERVICES, INC. DELEK US HOLDINGS, INC.

Industry Electrical goods wholesale dealing in Metal cans and shipping containers Holding offices Meat products Miscellaneous health and allied services, not elsewhere classified Insurance carriers Radio and television broadcasting stations Medical and dental laboratories Railroads Motor vehicles and motor vehicle equipment Electrical work Computer programming, data processing, and other computer-related services Surgical, medical, and dental instruments and supplies Computer programming, data processing, and other computer-related services Research, development, and testing services Electric services Miscellaneous shopping goods stores Electronic components and accessories Electric services Retail stores, not elsewhere classified Commercial sports Hospitals Holding offices Combination electric and gas, and other utility services Electric services Beverages Cable and other pay television services Cable and other pay television services Personal credit institutions Sanitary services Petroleum refining (continued)

Appendices # 287 288 289 290 291 292 293

Company CHESAPEAKE ENERGY CORP INTERPUBLIC GROUP OF COMPANIES, INC. PULTEGROUP, INC. BORGWARNER INC. NEWELL BRANDS, INC. NEWS CORPORATION HENRY SCHEIN, INC.

294 295 296

MOHAWK INDUSTRIES, INC. SONIC AUTOMOTIVE, INC. OWENS & MINOR, INC.

297

BOSTON SCIENTIFIC CORP

298 299 300 301

303

ALTICE USA, INC. NEWMONT CORPORATION ADVANCE AUTO PARTS, INC. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED XEROX HOLDINGS CORPORATION PVH CORPORATION

304

LAM RESEARCH CORP

305

CONAGRA BRANDS, INC.

306 307

313 314 315

O'REILLY AUTOMOTIVE, INC. HERTZ GLOBAL HOLDINGS , INC. HORMEL FOODS CORP NRG ENERGY, INC. HILTON WORLDWIDE HOLDINGS INC. PIONEER NATURAL RESOURCES CO CASEY'S GENERAL STORES, INC. AGCO CORP UNITED RENTALS, INC. EASTMAN CHEMICAL CO

316

AVIS BUDGET GROUP, INC.

302

308 309 310 311 312

109 Industry Crude petroleum and natural gas Advertising Operative builders Motor vehicles and motor vehicle equipment Miscellaneous plastics products Newspapers: publishing or publishing and printing Professional and commercial equipment and supplies wholesale dealing in Carpets and rugs Motor vehicle dealers (new and used) Professional and commercial equipment and supplies wholesale dealing in Surgical, medical, and dental instruments and supplies Telephone communications Gold and silver ores Auto and home supply stores Combination electric and gas, and other utility services Miscellaneous business services Men's and boys' furnishings, work clothing and allied garments Special industry machinery, except metalworking machinery Canned, frozen and preserved fruits, vegetables, and food specialities Auto and home supply stores Automotive rental and leasing, without drivers Meat products Electric services Hotels and motels Crude petroleum and natural gas Grocery stores Farm and garden machinery and equipment Miscellaneous equipment rental and leasing Plastics materials and synthetic resins, synthetic rubber, cellulosic, and other manmade fibers, except glass Automotive rental and leasing, without drivers (continued)

110 # 317 318 319 320

Appendices Company J.B. HUNT TRANSPORT SERVICES, INC. VISTRA ENERGY CORP. VMWARE, INC.

325

AIR PRODUCTS & CHEMICALS, INC. MOSAIC COMPANY (THE) HUNTINGTON INGALLS INDUSTRIES, INC. BERRY GLOBAL GROUP, INC. ANIXTER INTERNATIONAL INC. ALASKA AIR GROUP, INC.

326 327 328 329 330

YUM CHINA HOLDINGS, INC. VERITIV CORPORATION WILLIAMS COMPANIES, INC. TARGA RESOURCES CORP. COTY INC.

331 332 333

UNIVAR SOLUTIONS INC. DANA INCORPORATED FRONTIER COMMUNICATIONS CORPORATION AUTOLIV, INC. DARDEN RESTAURANTS, INC. NATIONAL OILWELL VARCO, INC. EVERSOURCE ENERGY DICK'S SPORTING GOODS, INC. RYDER SYSTEM, INC. CAESARS ENTERTAINMENT CORPORATION OSHKOSH CORPORATION WESCO INTERNATIONAL, INC. TRACTOR SUPPLY COMPANY

321 322 323 324

334 335 336 337 338 339 340 341 342 343 344 345 346

COMMSCOPE HOLDING COMPANY, INC. FIFTH THIRD BANCORP GAMESTOP CORP.

347 348

SANMINA CORPORATION AMPHENOL CORP

Industry Trucking and courier services, except air Electric services Computer programming, data processing, and other computer-related services Industrial inorganic chemicals Agricultural chemicals Ship and boat building and repairing Miscellaneous plastics products Electrical goods wholesale dealing in Air transportation, scheduled and air courier services Eating and drinking places Miscellaneous services incidental to transportation Gas production and distribution Gas production and distribution Soap, detergents and cleaning preparations, perfumes, cosmetics, and other toilet preparations Chemicals and allied products wholesale dealing in Motor vehicles and motor vehicle equipment Telephone communications Motor vehicles and motor vehicle equipment Eating and drinking places Machinery, equipment, and supplies wholesale dealing in Electric services Miscellaneous shopping goods stores Automotive rental and leasing, without drivers Miscellaneous amusement and recreation services Motor vehicles and motor vehicle equipment Electrical goods wholesale dealing in Miscellaneous nondurable goods wholesale dealing in Telephone communications Holding offices Radio, television, consumer electronics, and music stores Electronic components and accessories Electronic components and accessories (continued)

Appendices # 349

350 351

352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372

Company EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. EMCOR GROUP INC. WESTLAKE CHEMICAL CORPORATION CONSTELLATION BRANDS, INC. CAMPBELL SOUP CO JETBLUE AIRWAYS CORPORATION SPARTANNASH COMPANY LIBERTY MEDIA CORPORATION CHENIERE ENERGY, INC. HERSHEY COMPANY (THE) FOOT LOCKER INC. ZIMMER BIOMET HOLDINGS, INC. RAYMOND JAMES FINANCIAL INC MOTOROLA SOLUTIONS, INC. THOR INDUSTRIES, INC. MARKEL CORP. REGENERON PHARMACEUTICALS, INC. J. M. SMUCKER COMPANY (THE) SIRIUS XM HOLDINGS INC. ALLIANCE DATA SYSTEMS CORP PPL CORP DEAN FOODS COMPANY QUEST DIAGNOSTICS INCORPORATED W. R. BERKLEY CORP

111 Industry Arrangement of transportation of freight and cargo

Electrical work Plastics materials and synthetic resins, synthetic rubber, cellulosic, and other manmade fibers, except glass Beverages Canned, frozen and preserved fruits, vegetables, and food specialities Air transportation, scheduled and air courier services Groceries and related products wholesale dealing in Communications services, not elsewhere specified Gas production and distribution Sugar and confectionery products Shoe stores Surgical, medical and dental instruments and supplies Holding offices Communications equipment Motor vehicles and motor vehicle equipment Insurance carriers Drugs Canned, frozen and preserved fruits, vegetables, and food specialities Radio and television broadcasting stations Computer programming, data processing, and other computer-related services Electric services Dairy products Medical and dental laboratories Insurance carriers