AN EFFECTIVE MODEL TO PREDICT CASH FLOW BASED ON A COMPARISON OF THE RELEVANT MODELS: CASE OF TEHRAN STOCK EXCHANGE

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SAGHAFI A.A.; FADAEI H.R.

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Journal: THE IRANIAN ACCOUNTING AND AUDITING REVIEW Year:2008 | Volume:14 | Issue:50 Page(s): 3-24

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Title

AN EFFECTIVE MODEL TO PREDICT CASH FLOW BASED ON A COMPARISON OF THE RELEVANT MODELS: CASE OF TEHRAN STOCK EXCHANGE

Author(s)

SAGHAFI A.A. | FADAEI H.R. | Issue Writer Certificate

Keywords

ACCRUALSQ2

CASH FLOW FROM OPERATIONSQ3

CASH FLOW PREDICTIONQ3

VOLATILITY OF OPERATIONAL PROFITQ3

VOLATILITY OF SALESQ3

Abstract

This paper studies the cash flows forecast models and compares the predictive ability of models based on absolute forecast error. Also in this paper, as the indicator of volatility of business environment, the effects of VOLATILITY OF SALES and volatility of operating profit have been used and the effect of firm size on predictive ability of each model has been considered. In order to study above mentioned, three following hypotheses have been tested in this paper: Hypothesis 1: the predictive ability of future cash flows based on ACCRUALS models is more than those models which only use the cash flows information. Hypothesis 2: the predictive ability of ACCRUALS based models and those models which only use the cash flows in their predictions, change as VOLATILITY OF SALES and volatility of operating profit. Hypothesis 3: the predictive ability of ACCRUALS based models and those models which only use the cash flows in their predictions, increase as the firm size increases. Models: In this paper the following four models have been tested: 1) Cash Flow Random Walk Model CFOi,t+1= CFO i,t 2) Cash Flow Regression Model CFOi,t+1= q0+q1 CFO i,t +Ui,t 3) Barth Model CFO i,t+1=j +jcf CFOi,t + jARDAri,t + jDINVi,t + jAP DAPi,t + jDDEPRi,t + joOTHERi,t + Ui,t 4) Total Accrual Model CFit+1=j0+ j1CFOi,t + j2ACCRUALS i,t+ Ui,tThe first two above mentioned models are based on cash flows and the other models forecast the future cash flow based on ACCRUALS. In hypothesis I the predictive ability of future cash flows is obtained for all models. Predictive ability of models is measured through the use of absolute forecast error and each model which has the lowest prediction error is used as an efficient model for cash flows prediction. Hypothesis 2 and 3 are tested through the use of Spearman correlation test between firm characteristics and the absolute forecast error (scaled by averaged total assets) of four models. In this paper the elimination method has been used as sampling method of this study. With application of this method a sample of 165 companies has been chosen and seven years related data has been taken from financial statement.Results: With consideration of absolute forecast error of models 3 and 4 which have been mentioned as accrual models in this paper, it can be understood that these models have lower absolute forecast error than cash models. Also based on lower absolute forecast error, model 4 is more efficient than other mentioned models. Therefore the Hypothesis 1 is proved. The first Hypothesis has been tested across different industries and as the results show, it has been proved in most industries. Evidence show that according to consideration of Spearman correlation test between VOLATILITY OF SALES and volatility of operating income and models' absolute forecast error, VOLATILITY OF SALES and operating profit affect on models' forecast error. Therefore the absolute forecast error of models increases with increase in VOLATILITY OF SALES and operating profit as a result the second Hypothesis is also accepted. The third Hypothesis is rejected because of the weak correlation between the firm size and the absolute forecast error of cash flow models. Therefore there is no meaningful relation between the firm size and predictive ability of models. Conclusion: According to the results of this research and in comparison with cash flow based models, ACCRUALS based models have extra predictive ability. In model 3, components of ACCRUALS items and operating cash flow are used for prediction of future cash flow. According to obtained results, application of depreciation expense is not meaningful in above mentioned model and its coefficient equal to zero. This can declared as absence of effect of long term ACCRUALS on predictive ability of model 3. According to the results obtained in different industries it can be declared that transactions accomplished by motor vehicles and auto parts and machinery and equipment industries are mostly on cash basis and there is less relation between ACCRUALS and future cash flows but this is not true for abstract other industries and accrual models have been obtained as efficient models for cash flows prediction. Effect of firm characteristics on predictive ability of models: The results of Spearman correlation show that there is a relatively weak correlation between firm characteristics and predictive ability of models. But, it also show that the business environment of the firm effect on absolute forecast error of models. It is also possible that other factors such as firms operating circle inflation, growth and stagnation period effect on predictive ability of cash flows. According to obtained results there is no meaningful correlation between the firmsize and predictive ability of models. Especial economic environment of Iran and misrepresentation of cash flows has caused many firms, even large enterprises to present their statement of cash flows inaccurately. This may be a reason for absence of impressibility of absolute forecast error of models on thefirmsize.

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APA: Copy

SAGHAFI, A.A., & FADAEI, H.R.. (2008). AN EFFECTIVE MODEL TO PREDICT CASH FLOW BASED ON A COMPARISON OF THE RELEVANT MODELS: CASE OF TEHRAN STOCK EXCHANGE. THE IRANIAN ACCOUNTING AND AUDITING REVIEW, 14(50), 3-24. SID. https://sid.ir/paper/8272/en

Vancouver: Copy

SAGHAFI A.A., FADAEI H.R.. AN EFFECTIVE MODEL TO PREDICT CASH FLOW BASED ON A COMPARISON OF THE RELEVANT MODELS: CASE OF TEHRAN STOCK EXCHANGE. THE IRANIAN ACCOUNTING AND AUDITING REVIEW[Internet]. 2008;14(50):3-24. Available from: https://sid.ir/paper/8272/en

IEEE: Copy

A.A. SAGHAFI, and H.R. FADAEI, “AN EFFECTIVE MODEL TO PREDICT CASH FLOW BASED ON A COMPARISON OF THE RELEVANT MODELS: CASE OF TEHRAN STOCK EXCHANGE,” THE IRANIAN ACCOUNTING AND AUDITING REVIEW, vol. 14, no. 50, pp. 3–24, 2008, [Online]. Available: https://sid.ir/paper/8272/en

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