International evidence of nexus between positive operating cash activities and cost of debt
DOI:
https://doi.org/10.18533/jefs.v3i03.82Keywords:
Credit ratings, default risk, operating cash position.Abstract
This paper identifies the affiliation between the ending cash balance of the operating section in the cash flow statement and the bonds ratings. Our sample includes 600 companies from 26 countries. The study was conducted over a period of 18 years. An Ordered Probit regression analysis had been applied to identify how the positive cash balance of the operating section in the cash flow statement shapes the probability of escalating the bonds ratings. We find burly proof that the positive operating cash balance considerably affects the bonds ratings. In other words, when a company is able to generate enough cash from its main operating activities, the likelihood of having higher bonds ratings raises; this entails a low cost of debt since higher bond ratings have been proven to lessen the company’s cost for raising funds (in the form of bonds). The results add more confirmation to the creditors’ rights shields and how it affects the cost of debt.References
Alderson, M. and B. Betker. (1995) "Liquidation costs and capital structure." Journal of Financial Economics 39: 45-69. http://dx.doi.org/10.1016/0304-405X(94)00825-L
Allen, F. and Gale, D. (2000). "Financial Contagion," Journal of Political Economy, Vol. 108 (1), 1-33. http://dx.doi.org/10.1086/262109
Bhojraj, S. and P. Sengupta, (2003), "Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and the Outside Directors." The Journal of Business, 76, pp. 455-475. http://dx.doi.org/10.1086/344114
Bhattacharya, N., H. Desai and K. Venkataraman (2008), "Earnings quality and information asymmetry: Evidence from trading costs," Working Paper, Edwin L. Cox School of Business, Southern Methodist University.
Bhattacharya, N., F. Ecker, P. Olsson and K. Schipper (2009), "Direct and mediated associations among earnings quality, information asymmetry and the cost of equity," Working Paper, Fuqua School of Business, Duke University.
Boubakri, N., and Ghouma, H., (2007), "Creditor Rights Protection, Ultimate Ownership and the Debt Financing Costs and Ratings: International Evidence.
Brennan, M., T. Chordia and A. Subrahmanyam (1998), "Alternative factor specifications, security characteristics and the cross-section of expected stock returns," Journal of Financial Economics, 49, 345-373. http://dx.doi.org/10.1016/S0304-405X(98)00028-2
Defond, M. and J. Jiambalvo. (1994) "Debt covenant violation and manipulation of accruals." Journal of Accounting and Economics 17: 145-176. http://dx.doi.org/10.1016/0165-4101(94)90008-6
Gilson, S. C. (1997) "Transactions costs and capital structure choice: Evidence from financially distressed firms." Journal of Finance 52): 161-196. http://dx.doi.org/10.1111/j.1540-6261.1997.tb03812.x
Hamdi B. Hatem G. and El-Mehdi A. (2014) "Auditor Choice and Corporate Bond Ratings: International Evidence" International Journal of Economics and Finance; Vol. 6, No. 1; 2014
Holmström, B. and Tirole, J. (2001). "LAPM: A Liquidity-Based Asset Pricing Model'', The Journal of Finance, Vol. 56 (5), 1837-1867. http://dx.doi.org/10.1111/0022-1082.00391
Kasznik, R. (1999), "On the association between voluntary disclosure and earnings management," Journal of Accounting Research, 37 (1999), 57–81. http://dx.doi.org/10.2307/2491396
Kim, O. and R. E. Verrecchia (1991), "Market reaction to anticipated announcements," Journal of Financial Economics, 30, 273-309. http://dx.doi.org/10.1016/0304-405X(91)90033-G
Kim, O. and R. E. Verrecchia (1994), "Market liquidity and volume around earnings announcements," Journal of Accounting and Economics, 17, 41-67. http://dx.doi.org/10.1016/0165-4101(94)90004-3
Klock, M., S. Mansi and W. Maxwell, (2005), "Does corporate governance matter to bondholders." Journal of Financial and Quantitative Analysis, 40, 4, pp. 693-720. http://dx.doi.org/10.1017/S0022109000001940
Kubota, K. and H. Takehara (2009), "Information based trade, the PIN variable, and portfolio style differences: Evidence from Tokyo stock exchange firms," Pacific-Basin Finance Journal, 17, 319-337. http://dx.doi.org/10.1016/j.pacfin.2008.06.001
Sengupta, P., (1998), "Corporate Disclosure Quality and the Cost of Debt." The Accounting Review, 73, pp. 459-474.
Shleifer, A. and Vishny, R., (1997), "A Survey of Corporate Governance". Journal of Finance, vol. 52, issue 2 http://dx.doi.org/10.1111/j.1540-6261.1997.tb04820.x
Watts, R. L. and Zimmerman, J. L. (1986) Positive Accounting Theory. Englewood Cliffs, N. J.: Prentice Hall.
White, H. "A heteroscedasticity-consistent covariance matrix and a direct test heteroscedasticity." Econometrica 48 (1980): 817-838. http://dx.doi.org/10.2307/1912934
Willenborg, M. (1999) "Empirical Ana lysis of the Economic Demand for Auditing in the Initial Public Offering Market." Journal of Accounting Research 37: 225-238. http://dx.doi.org/10.2307/2491405.
Downloads
Published
Issue
Section
License
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after official publication, as it can lead to productive exchanges as well as greater citation of published work (See The Effect of Open Access).
