Relationship between Earnings Response Coefficient and Free Cash Flow and State Ownership: Evidence in Brazil

Authors

  • Lauren Venturini UFSC
  • Suliani Rover Universidade Federal de Santa Catarina
  • José Alonso Borba Universidade Federal de Santa Catarina
  • Leonardo Flach Universidade Federal de Santa Catarina

DOI:

https://doi.org/10.17524/repec.v18i2.3330

Keywords:

Fluxo de Caixa Livre; Coeficiente de Resposta de Ganhos (ERC); Propriedade Estatal; Informatividade do Preço das Ações.

Abstract

Objective: This study analyzes the impact of free cash flow and state ownership on the Earnings Response Coefficient (ERC) in the Brazilian capital market.

Method: A sample of 210 companies from 2011 to 2019 was obtained from the Economatica database, with the Earnings Response Coefficient being the dependent variable, free cash flow and state control being the main independent variables, in addition to control variables, which were analyzed using panel data regression with the Pooled Ordinary Least Squares (POLS) method.

Results: The results show that free cash flow accounting information has relevant marginal implications on the earning response coefficient and state ownership. The interaction between free cash flow and state ownership reinforces that increases in unexpected earnings are due to the presence of these two elements.

Contributions: The findings contribute to the literature on emerging markets by reporting that free cash flow (accounting data) and state monitoring (governance aspect) are informative items for the earnings response coefficient. Consequently, this can improve investors’ financial analysis and company evaluation process and make managers pay attention to the effects of the decision to maintain cash surpluses.

Therefore, it allows these stakeholders to understand that the existence of available resources (free cash flow) in a business indicates prospects of future earnings.

Author Biographies

Suliani Rover, Universidade Federal de Santa Catarina

Professora do Departamento de Ciências Contábeis e do Programa de Pós-Graduação em Ciências Contábeis (PPGC) da Universidade Federal de Santa Catarina (UFSC). Doutora em Contabilidade pela Universidade de São Paulo (Linha de Pesquisa: Contabilidade para Usuários Externos - FEA/USP). Mestre em Contabilidade e Bacharel em Ciências Contábeis pela Universidade Federal de Santa Catarina (UFSC). 

José Alonso Borba, Universidade Federal de Santa Catarina

Pós-doutoramento pela HEC - Hautes Études Commerciales de Montréal (Canadá) e pela Rutgers University (USA). Doutor em Contabilidade pela Universidade de São Paulo - USP. Professor da graduação e pós-graduação em Contabilidade na Universidade Federal de Santa Catarina - UFSC.

Leonardo Flach, Universidade Federal de Santa Catarina

Pós-doutor em Contabilidade e Finanças pelo Massachusetts Institute of Technology (MIT/EUA). Professor da graduação e pós-graduação em Contabilidade na UFSC.

References

Brook, Y., Charton Jr. W. T., & Hendershott, R. J. (1988). Do firms use dividends to signal large future cash flow increases? Financial Management, 27 (3), 46-57.

Brush, T. H., Bromiley, P. & Hendrickx, M. (2000). The free cash flow hypothesis for sales growth and firm performance. Strategic Management Journal, 21, 455-472.

https://doi.org/10.1002/(SICI)1097-0266(200004)21:4<455::AID-SMJ83>3.0.CO;2-P

Chang, X., Dasgupta, S., Wong, G., & Yao, J. (2014). Cash flow sensitivity and the allocation of internal cash flow. The Review Of Financial Studies, 27, 3628-3657.

Chen, X., Sun, Y., & Xu, X. (2016). Free cash flow, over-investment and corporate governance in China. Pacific-Basin Finance Journal, 37, 81-103

https://doi.org/10.1016/j.pacfin.2015.06.003

Cheung, W. M., & Jiang, L. (2016). Does free cash flow problem contribute to excess stock return synchronicity?. Review of Quantitative Finance and Accounting, 46, 123-140. https://doi.org/10.1007/s11156-014-0464-2

Collins, D. W., & Kothari, S. P. (1989). An analysis of intertemporal and cross-sectional determinants of earnings response coefficients. Journal of Accounting and Economics, 11 (2-3), 143-181. https://doi.org/10.1016/0165-4101(89)90004-9

Collins, D. W., Kothari, S. P., Shanken, J., & Sloan, R. G. (1994). Lack of timeliness and noise as explanations for the low contemporaneous return-earnings association. Journal of Accounting and Economics, 18 (3) (1994), 289-324. https://doi.org/10.1016/0165-4101(94)90024-8

Dechow, P., Ge, W., Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344-401. https://doi.org/10.1016/j.jacceco.2010.09.001

Deng, L., Li, S., Liao, M., & Wu, W. (2013). Dividends, investment and cash flow uncertainty: Evidence from China. International Review of Economics and Finance, 27, 112-124. https://doi.org/10.1016/j.iref.2012.09.005

Dhaliwal, D. S., Lee, K. J., & Fargher, N. L. (1991). The association between unexpected earnings and abnormal security returns in the presence of financial leverage. Contemporary Accounting Research, 8(1), 20-41. https://doi.org/10.1111/j.1911-3846.1991.tb00832.x

Dichev, I., Graham, J., Harvey, C. R., & Rajgopal, S. (2016). The Misrepresentation of Earnings. Financial Analysts Journal, 72(1), 22-35. https://doi.org/10.2469/faj.v72.n1.4

Faulkender, M. & Wang, R. (2006). Corporate Financial Policy and the Value of Cash. The Journal of Finance, 61, 1957-1990. https://doi.org/10.1111/j.1540-6261.2006.00894.x

Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323-329.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

Kallapur, S. (1994). Dividend payout ratios as determinants of earnings response coefficients: A test of the free cash flow theory. Journal of Accounting and Economics, 17(3), 359-375. https://doi.org/10.1016/0165-4101(94)90033-7

Karpavičius, S., & Yu, F. (2017). How institutional monitoring creates value: Evidence for the free cash flow hypothesis. International Review of Economics & Finance, 52, 127-146. https://doi.org/10.1016/j.iref.2017.10.016

Kothari, S. P., & Sloan, R. G. (1992). Information in prices about future earnings: implications for earnings response coefficients. Journal of Accounting and Economics, 15(2-3), 143-171. https://doi.org/10.1016/0165-4101(92)90016-U

Lee, J. J. (2018). Economic determinants of price informativeness about future earnings.

Journal of Contemporary Accounting & Economics, 14(1), 83-102. https://doi.org/10.1016/j.jcae.2018.02.004

Loch, M., Silva, J. C., Bueno, G., & Marcon, R. (2020). O Governo como Acionista e o Conflito Principal-Principal no Setor Elétrico Brasileiro. BBR - Brazilian Business Review, 17 (1), 24-45. https://doi.org/10.15728/bbr.2020.17.1.2

Lundholm, R. & Myers, L. A. (2002). Bringing the future forward: the effect of disclosure on the returns-earnings relation. Journal of Accounting Research, 40 (3), 809-839. https://doi.org/10.1111/1475-679X.00072

McCabe, G. M., & Yook, K. C. (1997). Jensen, Myers-Majluf, free cash flow and the returns to bidders. The Quarterly Review of Economics and Finance, 37(3), 697-707. https://doi.org/10.1016/S1062-9769(97)90018-1

Mikkelson, W., & Partch, M. (2003). Do Persistent Large Cash Reserves Hinder Performance? Journal of Financial and Quantitative Analysis, 38(2), 275-294. https://doi.org/10.2307/4126751

Park, K., & Jang, SooCheong (Shawn). (2013). Capital structure, free cash flow, diversification and firm performance: a holistic analysis. International Journal of Hospitality Management, 33, 51-63. https://doi.org/10.1016/j.ijhm.2013.01.007

Pimentel, R. C. (2015). Lucros Inesperados, Retorno das Ações e Risco no Mercado de Capitais Brasileiro. Revista Contabilidade & Finanças, 26(69), 290-303. https://doi.org/10.1590/1808-057x201501270

Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11, 159-189. https://doi.org/10.1007/s11142-006-9012-1

Zhang, D., Cao, H., Dickinson, D. G., & Kutan, A. M. (2016). Free cash flows and overinvestment: Further evidence from Chinese energy firms. Energy Economics, 58, 116-124. https://doi.org/10.1016/j.eneco.2016.06.018

Yaari, U., Nikiforov, A., Kahya, E., & Shachmurove, Y. (2016). Finance methodology of Free Cash Flow. Global Finance Journal, 29, 1-11. https://doi.org/10.1016/j.gfj.2015.05.003

Yeo, Hee-Jung. (2018). Role of free cash flows in making investment and dividend decisions: The case of the shipping industry. The Asian Journal of Shipping and Logistics, 34(2), 113-118. https://doi.org/10.1016/j.ajsl.2018.06.007

Downloads

Published

2024-06-29

How to Cite

Venturini, L. ., Rover, S., Alonso Borba, J., & Flach, L. (2024). Relationship between Earnings Response Coefficient and Free Cash Flow and State Ownership: Evidence in Brazil. Journal of Education and Research in Accounting (REPeC), 18(2). https://doi.org/10.17524/repec.v18i2.3330

Issue

Vol. 18 No. 2 (2024): April - June

Section

Articles

License

Copyright (c) 2024 Journal of Education and Research in Accounting (REPeC)

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International 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 Creative Commons Attribution 3.0 Unported License, which allows the sharing of the work and recognition of authorship and its initial publication in this journal. This license allows others to distribute, remix, adapt, or create derivative works, even for commercial purposes, provided credit is given for the original creation.

b)There is no financial compensation to the authors in any capacity, for articles published in RePEc.

c) The articles published in RePEc are the sole responsibility of the authors.