The consistent estimation of future cash flow and future earnings: a predictive model with accounting double entry constraint

In empirical financial accounting research, there continues to be a debate as to what the best predictors of future earnings and future cash flows might be. Past accruals, earnings and cash flows are the most common predictors, but there is no consensus over their relative contributions, and little attention to the underlying accounting identities that link the components of these three prominent variables. The aim of this thesis is to investigate this controversy further, and to apply an innovative method which yields consistent estimations of future earnings and cash flows, with higher precision and greater efficiency than is the case in published results to date. The estimation imposes constraints based on financial statement articulation, using a system of structural regressions and a framework of simultaneous linear equations, which allows for the most basic property of accounting - double entry book-keeping - to be incorporated as a set of constraints within the model. In predicting future cash flows, the results imply that the constrained model which observes the double entry condition is superior to the models that are not constrained in this way, producing (a) rational signs consistent with expectations, not only in the entire sample but also in each industry, (b) evidence that double entry holds, based on the Wald test that the estimated marginal responses sum to zero, and (c) confirmation of model improvement by way of a higher likelihood and greater precision attached to predictor variables. Furthermore, by then using an appropriately specified model that observes the double entry constraint in order to predict earnings, the thesis reports statistically significant results, across all industries, that cash flows are superior to accruals in explaining future earnings, indicating also that accruals with a lower level of reliability tend to be more relevant in this respect

Frequency of financial reports

Interim reports are summary statements that are usually prepared in semi-annual format in the UK. Until the EU’s Transparency Directive was put into practice in the UK in 2007, there was no legal necessity for companies to provide interim financial reports. (Note 1) Instead such preparation was only a regulatory requirement of the London Stock Exchange. The responsibility on companies listed on the London Stock Exchange to provide these financial reports was first prepared as an suggestion in 1964, to meet the requirements for updates by financial analysts (May, 1971). In 1973, this advice to provide the market with interim information became a requirement for the admission of stocks and securities to be listed on the stock Exchange (Lunt, 1982). This study investigates the preparation of interim reports, and accounting standards for interim reporting. Also, this study discusses the main purpose of interim reports, the methods of preparation and the benefits of reporting frequency

Perceptions of Regulation on the UK Mortgage Market: A Step Too Far?

Poor risk management within firms was the result of deregulation and the Big Bang of 1986. Without a regulator and in order to achieve financial growth, firms inadequately managed their risk. The 2007 financial crisis was a wake up call to the UK highlighting that companies could not carry on in this manner. The financial crisis resulted in the FSA assuming the role of an active regulator, thus many requirements were implemented including the Capital Adequacy Ratio. Consequently, gross mortgage lending decreased by 63% during 2007-2010. Therefore, this study investigates the perceptions of the current level of regulation on the UK mortgage market. The research found there is a strong perception that the level of regulation is hindering lending and competition within the market. More specifically this study uses a qualitative approach of in-depth interviews with five financial and regulatory professionals. The results suggest that two professionals perceived regulation as positive for the UK mortgage market. Regulation is perceived positively because of its ability to give consumers greater market confidence, the implementation of loss mitigation strategies that prevent house repossession and the loss of irresponsible lenders. Three professionals perceived regulation as highly negative because it has reduced the lending rate, created barriers to entry thus reducing competition, has moved careless lending to other areas of the market such as payday loans, has created a substantial cost burden, has used a one-size-fits-all approach and has not removed fraudulent activity completely. Overall these results suggest that UK economy may struggle to get out of this recessionary period as long as there are uniform capital requirements imposed on UK lenders. It is recommended that the regulator may take an approach that lessens the requirements enforced on non-bank lenders. However, the capital requirements should be imposed on banks that have wider implications for the UK economy and caused the current financial crisis in order to prevent future financial crises. Another recommendation is the segmentation of building societies from banks as seen in the 1970s. The separation would create market confidence and would result in greater local knowledge; this would stimulate growth within the UK mortgage market

The impact of single and multiple mergers and acquisitions on shareholders' wealth of UK bidder firms

This study investigates the impact of takeover announcements on UK acquirer shareholders’ wealth during the period 2002-2006. More specifically, it is investigated whether the impact of single acquirers on shareholders’ wealth is significantly different from the impact of multiple acquirers. Findings suggest that acquirer shareholders experience positive abnormal returns during the announcement period. Moreover, the results indicate single acquirers consistently outperform multiple acquirers when testing for deal characteristics such as: payment method (cash or equity), target status (public or private), target location (domestic or cross crosspayment method (cash or equity), target status (public or private), target location (domestic or cross-border and industry relatedness (specification or diversification). Performance declines with sequential acquisitions due to merger programme announcement hypothesis. Successful first time acquirers suffer from hubris whilst unsuccessful first time acquirers learn from their experiences suggested by the organisation learning hypothesis but go on to suffer from hubris. Acquisitions of private firms yield significant abnormal returns whereas public acquisitions reduce the value of UK acquirers. The effect of cash and equity, domestic and foreign, related and unrelated takeovers are inconclusive for the short-term windows investigated by this study

The long-run performance of U.S. bidding firms in the post M&A period : the impact of bid type, payment method and industry specialisation

This study investigates how mergers and acquisitions (M&A) affect the wealth of shareholders of public firms in the United States (U.S). More specifically, it investigates whether the nature of the bid, the payment method used, and the type of M&A have implications for shareholders of U.S bidding firms. The study analyses 352 mergers and acquisitions in the U.S during the period 1999-2008, and its results indicate that bidding firms suffer significant negative buy-and-hold abnormal returns in the three years period after a M&A announcement. The results also suggest that, in the long-run, hostile bids and cash-financed bidders outperform friendly bids and stock-funded bidders, respectively. Furthermore, the study also finds that in the long-run bidder firms that focus on industry specialisation within their M&A targets significantly outperform firms that adopt a more diversified strategy. The analysis also investigates the effects of M&A specialisation/diversification in six different sectors, and finds that specialised bidders outperform diversified bidders in four sectors: consumer & basic materials, energy & utilities, communications and technology. Furthermore, bidder firms in the financial services sector perform significantly better when diversifying into other sectors, while the performance of bidder firms in the industrial sector appears unaffected by the degree of M&A specialisation or diversification