The empirical findings of this study provide a comprehensive examination of the relationship between corporate value and fluctuations in cash flow and earnings, showing an inverse correl
Introduction
Research rationales
The primary objective of business leaders is to optimize the value of the organization In order to achieve this objective, it is imperative to efficiently manage all variables that have the potential to impact the valuation of the organization
In conventional business concepts, business managers and investors tend to prioritize key performance indicators such as revenue, profit, and corporate assets Nevertheless, in regard to modern business environments and the emergence of stock markets, it has become imperative for business proprietors to adopt a more comprehensive perspective encompassing various indicators that can be employed to evaluate the company's potential for growth In addition to revenue and profit, investors must also consider other metrics in order to assess the potential for sustainable long-term returns and the level of risk associated with investing in businesses within the market
Numerous empirical investigations have demonstrated that various determinants exert an influence on the valuation of a business entity, encompassing revenue generation, cost structure, market competitiveness, and the changing business environment There has been considerable scholarly interest in examining the relationship between cash flow, earnings, and enterprise value The process of monitoring a company's cash flow provides insight into the degree of liquidity in a leader's allocation of assets Cash flow serves as a crucial indicator for creditors and stockholders, as well as a foundation for making strategic decisions regarding reinvestment for the purpose of achieving growth and expansion Moreover, the
10 variability of cash flow over a specific timeframe also serves as an indicator of the resilience of the organization during periods of financial hardship On the other hand, earnings represent a primary metric that individuals tend to assess as a preliminary step when expressing interest in a particular business The numerical values correspond to the financial outcomes, operational capabilities, managerial performance, and investor expectations within a business context Nevertheless, if the company experiences a substantial increase in earnings in the preceding year but encounters a significant decline in the subsequent year, it could possibly indicate that the company's business operations are not viable and sustainable in the long run.While numerous studies have explored the correlation between these two factors, there remains a gap in the literature regarding the association between variations in cash flow and earnings The topic is receiving minimal attention.This study aims to investigate the correlation between cash flow, income volatility, and enterprise value, based on the aforementioned justifications This will serve as the foundation for formulating recommendations to investors and business executives
This study will primarily examine the correlation between the fluctuation of cash flow and earnings within a specific timeframe and the overall valuation of a business, rather than solely presenting the annual outcomes of these financial metrics The findings hold significance not only for business proprietors aiming to optimize company worth, but also serve as informative materials for investors to consider prior to making decisions This is particularly relevant given the fluctuating nature of corporate ratios, which provide insights into a company's long-
11 term performance and are directly linked to the risk associated with allocating assets to its shares
This study presents empirical evidence indicating that earning volatility incurs significant costs and is negatively associated with firm value It appears that managers, analysts, and institutional investors of firms primarily prioritize the earnings of the respective companies, rather than placing significant emphasis on cash flow The presence of earnings volatility serves as an indicator of the financial stability or instability of firms, alongside cash flow volatility Numerous rationales exist for the significance of earnings volatility as a determinant of firm value Business analysts and institutional investors typically exhibit a tendency to refrain from engaging with highly volatile firms, and consequently, they advise investors to adopt a similar approach of avoiding investments in such companies The likelihood of experiencing forecast error is positively correlated with the level of volatility in firms' earnings and cash flows.
Research Questions
This study has the following research questions:
1 To what extent does the level of earnings volatility impact the valuation of a firm?
2 Does cash flow volatility affect the firm value?
3 In case of a significant impact, does the magnitude of the impact on enterprise value differ between cash flow fluctuations and corporate income fluctuations?
4 Is there a discernible distinction between large and small firms regarding the correlation between firm value and variations in cash flow and earnings?
Objectives of the study
This research further contributes to the existing literature by examining the impact of two additional factors, specifically cash flow volatility and earnings volatility, on firm value This study aimed to empirically examine the hypothesis that firms with stable financial statements are valued at a higher premium compared to firms with volatile financial statements Although the present study does not specifically examine the underlying causes of earning volatility and cash flow volatility, it does aim to test the hypothesis that financiers assign greater value to firms with more stable cash flows
This study makes a valuable contribution to the existing body of literature by empirically examining the hypothesis that companies of Top 4 Asean countries with stable financial performance are assigned a higher value compared to companies with fluctuating financials The analysis takes into account various factors that influence firm value, including size, leverage, and profitability, in order to isolate the specific impact of financial stability If there is evidence, as documented by Minton and Schrand (1999), that cash flow volatility incurs costs, it can be inferred that it will have a negative impact on the value of a firm This finding holds significance as it elucidates the transmission mechanism by which risk management can influence the value of a firm, specifically by generating a more consistent sequence of financial statements Furthermore, this finding serves as a valuable addition to the existing body of evidence presented by Minton and Schrand (1999)
13 regarding the expenses associated with fluctuations in cash flow It effectively demonstrates the detrimental effect that cash flow volatility has on the firm value
Furthermore, Jayaraman (2008) also examines the proposition that fluctuations in earnings have an adverse impact on the valuation of a company The management of financial risk has a direct impact on the volatility of cash flow, which subsequently influences the volatility of earnings Nevertheless, companies have the ability to directly influence the volatility of their earnings through the practice of earnings smoothing According to Lang et al (2002), a decrease in earnings volatility could potentially lead to an increase in the number of analysts who follow a company and enhance its value Additionally, Badrinath et al (1989) suggest that low earnings volatility may attract a greater number of institutional investors Furthermore, Trueman and Titman (1988) propose that reduced earnings volatility could potentially lower the perceived borrowing costs for a company Although I do not conduct a direct analysis of the correlation between earnings volatility and risk management, the results align with a wide range of theories that highlight the advantages of implementing risk management practices within a firm This study presents compelling evidence that the presence of earnings volatility incurs significant costs and is associated with a decrease in firm value
The goal of this study is to contribute additional empirical evidence in addressing two inquiries about the concept of smooth financial statements The first inquiry examines whether investors place significance on earning volatility The second inquiry investigates whether investors are concerned about cash flow volatility in relation to firm value This study presents compelling evidence regarding the
14 impact of earnings volatility and cash flow volatility on firm value, specifically examining which factor has a greater influence.
Research methodology
The documentary research method employs a classification and systematic approach In order to carry out this study, pertinent documents pertaining to the variables influencing enterprise value were gathered and analyzed The articles pertaining to corporate value will be categorized into two distinct groups: objective factors and subjective factors These groups will encompass the various factors that influence corporate value The primary emphasis lies on subjective factors, which refer to the factors that organizations can actively manage in order to achieve a common goal of maximizing corporate value However, this study diverges from numerous other studies in its examination of firm value in relation to factors associated with firm performance In this study, the focus lies on the domain of enterprise risk management, wherein the underlying premise posits that companies exhibiting superior risk management practices are likely to possess greater value The quantification of risk will be accomplished through the analysis of cash flow and earnings fluctuations over a specified time frame, thereby establishing the correlation with the company's value
In order to comprehend the association between variables, a substantial amount of data was gathered The data utilized in this study are derived from secondary sources, specifically the balance sheet, income statement, and cash flow statement of companies of Top 4 Asean countries spanning a period of seven years, from 2016 to 2022
The present study employed the least squares method to examine the correlation between earnings volatility and cash flow volatility with the firm's value, while also considering other relevant variables The linear equation was derived from the literature review conducted in the previous chapter of this study This equation is used to examine the factors that significantly influence the firm's value
When there is a strong correlation between independent or predictor variables, the presence of multicollinearity becomes a concern This can potentially impact the results of regression analysis, as the independent variables no longer solely influence the dependent variable, but also begin to influence each other, leading to an overall impact on the results To address the concern of multicollinearity, it is necessary to examine the presence of a high correlation among the predictor variables The VIF (variance inflation factor) is employed This study also employs descriptive, analytical, and comparative statistical techniques Additionally, quantitative methods are utilized, specifically regression analysis using Ordinary Least Squares (OLS), Fixed Effects Model (FEM), and Random Effects Model (REM) to examine the association between the research variables and the enterprise value.
Research scope
By 2024, it is anticipated that the real GDP growth of ASEAN, including a select group of economies, will surpass 4.8% Thus, the road map is being strengthened, indicating that the country is on track to become the fourth-largest economy in the world by 2030 This economic sector consists of eleven members, but for the purposes of this study, I focused only on the four countries with the largest
16 economic scale (Indonesia, Singapore, Thailand, and Vietnam), each of which has an open economy and a stock market that outperforms the rest of the group
The companies in ASEAN operate in a dynamic environment, requiring them to not only adapt their management to these changes, but also have the financial means to do so This requires companies to be able to identify the desired level of smoothness in their financial statements, as well as the factors that can affect their ability to achieve these targets The volatility of earnings, volatility of cash flow, and both types of risk may have an impact on the firm's value The fluctuating nature of the financial environment influences businesses to create financial statements, which necessitates a structure that can adapt to changing requirements Literature demonstrates that earnings and cash flow volatility has a significant effect on a company's value
The nature of the tests, which necessitates the estimation of earnings and cash flow volatility, imposes stringent data inclusion requirements for the final sample To compute the market model, we select only companies with at least 28 quarterly operating cash flow and earnings for a given seven-year period (2016-2022) In addition, for each seven-year period, each company must have at least ten non- missing quarterly observations for earnings per share in order to estimate quarterly earnings volatility Since our tests utilize both forward- and backward-looking seven-year measures, firms must have sufficient data for both the prior and subsequent seven years to be included in the sample In the analysis, I use only valid observations for 2016 and 2022
Research structure
The research will be structured into three primary sections Chapter 2, titled
"Literature Review," provides an overview of the relevant theories Furthermore, this chapter will discuss the previous authors' research pertaining to all variables included in the model, as well as their respective associations with the dependent variable, which is the representation of firm value as TobinQ In the third chapter, titled "Data Description and Methodology," a comprehensive explanation is provided regarding the calculation formula employed to gather data for each variable Additionally, this chapter will also discuss the model employed for data analysis Chapter 4, titled "Data Analysis," will present a comprehensive examination of various statistical measures, including descriptive statistics Additionally, this chapter will discuss the outcomes of conducting a correlation analysis between variables, as well as the results obtained from testing the model Based on the findings, the author will provide insights regarding the correlation between cash flow and income volatility and its impact on the valuation of enterprises within the business nature of Southeast Asian nations
Literature review
Concepts of the firm value
Managers consistently prioritize enterprise value Nevertheless, the process of transferring monetary values to a company's complete range of assets is consistently intricate Numerous methodologies and research endeavors have been put forth to undertake the task of assessing the valuation of companies for different purposes
In their study, Eisfeldt and Papanikolaou (2013) employ a model that examines the sharing rule between a firm's owners and its key talent in order to estimate the value of organization capital The findings demonstrate that companies possessing a higher degree of organization capital exhibit a greater level of risk compared to companies with a lower degree of organization capital Based on the work of Lev and Radhakrishnan (2005), the authors of this study create a comprehensive metric for organization capital by utilizing selling, general, and administrative expenses This measure encompasses not only the monetary worth of the labor force, taking into consideration the expenses associated with training workers, but also incorporates knowledge capital, such as research and development expenditures, and brand capital, which accounts for advertising expenses, along with other expenses related to non-capital inputs Given our objective of analyzing the firm's value decomposition and assessing the respective influence of labor and various intangible capital inputs on the firm's market value,I prioritize the examination of individual components rather than relying solely on a comprehensive measure of organization capital
In order to analyze the firm's value decomposition and ascertain the respective influences of labor and various intangible capital inputs on market value,
19 the attention is directed towards evaluating individual components rather than relying solely on a comprehensive measure of organization capital However, it is worth noting that in the robustness section, I also explore an alternative model that incorporates this broader measure of intangible capital The significance of intangible capital, specifically knowledge and brand capital, in determining firm value is of utmost importance, as it exhibits considerable variation across different industries The study conducted by Hansen et al (2012) examines the risk attributes associated with intangible capital The significance of intangible capital in a q- theory model is examined through structural estimation by Li et al (2014)
In their investigation, Peters and Taylor (2017) put forth a novel metric for Tobin's
Q, which takes into consideration intangible capital They demonstrate that their metric outperforms existing proxies in explaining the overall investment of firms in both physical and intangible capital The structural model of the firm, which incorporates intangible capital, offers a quantitative breakdown of Tobin's Q into the value of each capital input based on optimal corporate policies encompassing labor hiring and investment in physical and intangible capital In their study, Fisher and McGowan (1983) conducted a comparison between Tobin's Q and the accounting rate of return as metrics for assessing firm value They argued that by integrating stock market data with accounting data, Tobin's Q offers a more precise evaluation of firm rent Tobin's q serves as the theoretical foundation for this framework The utilization of capital markets as a basis for assessing rental values exposes several inherent limitations in accounting profit rates Furthermore, according to Ganguli and Agrawal (2009), the Tobin's Q model incorporates inherent financial risk, leading to a more prospective assessment of the firm's value
For the purposes of this study, TobinQ was selected as the metric to measure business value This novel approach considers not only the market value of the business which emphasizes the significant influence of the share price on it Tobin's
Q theory establishes a relationship between the market-determined business value and the book value of the business Hence, the assessment of a company's value entails not only considering the perspectives of external investors but also examining the impact of the business operator's strategies on the company's worth.
The effect of earnings volatility on firm value
Badrinath et al (1989) investigated the effect of earnings volatility on firm value and found that institutional investors usually tend to avoid companies that are perceived to be risky or firms with high earnings volatility, instead, firms with smooth earning streams are usually preferred The volatility in firms earnings can result in error surprises, and it might end up increasing the firm's estimated cost of capital and the consequent reduction in its value
Minton and Schrand (1999) suggested in their research that the presence of earning volatility and cash flow volatility exerts a detrimental influence Their findings indicate a negative correlation between earnings volatility and both firm value and market value The hypothesis that earning volatility is negatively correlated with firm value has been supported by previous studies conducted by Faccio and Lang
(2002) Furthermore, it is worth noting that firms have the ability to directly influence their firm value through the practice of earnings smoothing, which is closely associated with the level of earnings volatility
The profitability of a business entity can exhibit volatility due to various factors Organizations, such as retailers, whose benefits are contingent upon the state of the economy, may experience unpredictable outcomes when the economy slows down and consumers reduce their spending on branded products, deviating from their usual behavior Food organizations may generate unpredictable consequences when the prices of commodities, such as grains and produce, increase and costs escalate
In their study, Polica and Mak (2015) sought to improve the accounting model employed by insurance companies for reporting various types of insurance contracts If adopted, the change was expected to result in fluctuations from one quarter to another among insurance companies and other financial institutions According to the findings of Frank and Goyal (2009), there is a significant negative relationship between earnings volatility and a firm's capital structure The outcome can be derived from two fundamental distinctions First, employ the annual variation in benefit returns as a metric for measuring volatility In contrast, the researchers employ a contingent earnings volatility measure developed by De Second and employ direct regression analysis to identify the robust factors In contrast, the authors examine the manner in which the relevant variable (obligation proportion) is an interval variable, while the contingent desire is a non-linear function of the independent factors
Iyer and Harper (2017) investigated the reported earnings and their associations with the discretionary accruals and the results show that firms with high prospects usually smooth reported earnings to affect the firm value Study of previous empirical work shows that volatile earning is usually avoided by the analysts and the firms as the likelihood of forecast errors is increased considerably, argued by
22 the (Brennan and Hughes, 1991).Badrinath et al (1989) performed a similar study and assessed that the companies with large variations in their earnings are usually avoided by the institutional investors
Shipe (2015) Income instability alludes to how steady, or unsteady, the profit of an organization is An expert may work with yearly or quarterly income figures An organization whose income changes an impressive arrangement is a risky venture Such volatile profits make it difficult for the administration to prepare Mainly when stores must be obtained for long-haul speculations, the anticipated income to respect obligation commitments may not appear This can mean substantial inconvenience, notwithstanding the seizure of benefits by loan specialists, and, in extraordinary cases
According to Choi and Richardson (2016), there can be two perspectives on understanding the relationship between earning volatility and leverage, either the debt financiers require a higher return due to volatile earnings, making debt financing more costly for the firm The other perspective is that, due to uncertain earnings, the firm is not able to manage regular repayments In both cases, leverage and volatility are inversely related Antoniou et al (2008) agency theory predicts a positive relationship among volatility and leverage because the problem of underinvestment gets resolved due to increased earnings volatility.
The effect of cash flow volatility on firm value
A comprehensive analysis has been conducted on a large sample of non-financial companies in order to ascertain the presence of a correlation between cash flow volatility and firm value There exists a negative correlation between cash flow
23 volatility and firm value, specifically Tobin's Q This association is deemed statistically significant when the market-to-book ratio is employed as a metric According to Thomas and Zhang (2002), there was an observed decrease in firm value ranging from 30% to 37% when the cash flow volatility increased by one standard deviation According to a recent study conducted by Schrand and Minton
(1999), it has been observed that increased cash flow volatility incurs higher costs, resulting in a negative impact on firm value The researchers discovered evidence indicating that hedging can potentially have a positive impact on firm value However, their study also highlights the detrimental effect of cash flow volatility on firm value, which is found to be significantly costly This finding is consistent with the findings of Leuz et al (2003)
According to Minton and Schrand (1999), there exists a negative association between increased cash flow volatility and reduced levels of investment in capital expenses, research and development (R&D), and advertising This affiliation demonstrates that companies have shifted away from relying on external capital markets to fully cover their cash flow deficits, opting instead to permanently forego investment opportunities There is a positive correlation between cash flow volatility and the advantageous pricing of external capital accessibility Furthermore, these previously increased expenditures, as assessed through certain indicators, indicate a heightened susceptibility of investment to fluctuations in cash flow Therefore, the volatility of cash flow not only increases the likelihood of a firm seeking entry into the capital markets, but also raises the expenses associated with obtaining external financing
Figlewski (1997) provides a comprehensive analysis of modern finance theory, offering several explanations for the potential relationship between anticipated cash flows and the risk of cash flow volatility The valuation of firms is commonly disaggregated into the value of tangible assets and the value of intangible assets There exists a notable body of literature that emphasizes the potential implications of growth forecasts Cash flow represents the tangible prospects for expansion derived from assets Companies that experience significant and heightened fluctuations in cash flow are more likely to have additional opportunities for growth that are continuously sustained The current options and potential for expansion suggest that a company's growth opportunities are significant
Cormier et al (2013) also discovered that, when considering the volatility of cash flow, a correlation is observed between greater earnings smoothing and a lower cost of capital According to Thomas and Bernard (1990), there exists a correlation between cash flow volatility and stock returns, which can be attributed to investors' tendency to overly focus on earnings as a measure of performance According to a recent study, which draws upon the findings of research conducted on corporate executives, it has been observed that financial markets generally exhibit a preference for consistent earnings and cash flows Harvey et al (2005)
The conclusions drawn by Ang et al (2006) highlight the significance of cash flow volatility and its implications for various aspects such as the estimation gaps of volatility, portfolio return budgeting systems, breakpoints for portfolio categorization, and the expansion and implementation of volatility controls According to Haugen et al (1996), there exists a positive correlation between the income yield, which is defined as the ratio of earnings to price, and future returns
The effect of size (Total Assets) on firm value
The size of a firm is considered to be a significant determinant of its growth, as it has a direct impact on both the firm's value and performance A firm characterized by a substantial quantity of total assets serves as an indicator of favorable growth prospects and holds appeal for potential investors, consequently leading to an augmentation in the market valuation of the firm A large corporation guarantees enhanced profitability, as the prospect of achieving substantial profits in the future is contingent upon the escalation of the firm's stock prices, which are directly correlated with the overall value of the firm
According to Pandey and Chotigeat (2004), there is a direct relationship between capital structure and size, and their impact on firm value According to a study conducted by Berger and Di Patti (2006), there exists a correlation between the size of a firm and its value Firms and companies are typically governed by majority shareholders, who possess the authority to enact adjustments in the firm's policies and management These majority shareholders often demonstrate a propensity to align their interests with external investors, thereby fostering the growth of the company and augmenting their own wealth (Lopez, 1999) The findings indicate that when the interests of majority shareholders, who hold control over the company, are fully aligned with those of external investors, it facilitates the expansion of the firm's total assets and scale This, in turn, has a positive influence on the market value of the firm
Rajan and Zingales (1995) conducted a study in which they examined the interaction between four variables and their associations with capital structure Their findings indicate a positive correlation between size and Tobin Q Rajan and
Zingales (1995) as well as Huang (2006) both observe a positive correlation between Tobin Q and firm size within the context of Chinese companies According to Anwar and Sun (2013), there exists an inverse correlation between the size of firms and their Q According to Harris and Raviv (1991), a positive correlation exists between firm size and firm value, as measured by Tobin's Q This relationship can be attributed to the fact that larger firms tend to have a higher degree of diversification and are more likely to utilize external financing options By doing so, these firms are able to achieve their desired capital structures According to Loof
(2004), it is also argued that firms with larger sizes exhibit a greater ability to promptly adapt to changes in their capital structure
According to Nivorozhkin (2004), a negative correlation exists between size and Tobin Karadeniz et al (2011) conducted a study to examine the indirect relationship between firm size and firm value The study posits that the optimal capital structure has an impact on firm value, and there exists a noteworthy correlation between the two variables It can be argued that the size of a firm and its reputation, achieved through the establishment of an optimal capital structure, may contribute to the enhancement of the firm's value
According to Rajan and Myers (1998), the presence of controlling shareholders in a company is associated with a tendency to allocate liquid assets towards expanding the company's size and increasing its total assets This strategic allocation ultimately contributes to the establishment of a positive reputation for the company, attracting external investors, and resulting in an increase in the firm's market value Based on the findings of existing literature, it can be posited that the size or total
27 assets of a firm exert influence on the growth of Tobin's Q and the market value of the firm.
The effect of profitability on firm value
The demonstration of high profitability indicates favorable prospects for a company, thereby eliciting a positive response from investors who, in turn, contribute to the augmentation of the firm's value This phenomenon can be comprehended due to the fact that a company that has successfully achieved higher profits suggests an outstanding performance, thereby instilling a favorable opinion among investors and subsequently leading to an augmentation in the company's stock value The rise in stock prices within the market will result in an increase in the overall value of the firm The assertion is substantiated by the findings of Terpstra and Verbeeten (2014), which indicate that the profitability ratio, as assessed through metrics such as Return on Investment (ROI) or Return on Assets (ROA), exerts a noteworthy impact on the value of a firm
Previous research has indicated that the configuration of financial risks and the practice of earnings smoothing have had an impact on the valuation of firms (Suranta and Pratana, 2004; Maryatini, 2006) The study conducted by Andri and Hanung (2007) examines the relationship between the investment opportunity set and the leverage effect on firm value According to the findings of Ulupui (2007), it has been demonstrated that the stock return is influenced by specific financial ratios, namely the current ratio and return on assets (ROA) The findings align with the perspective of Modigliani and Miller, which posits that the enterprise value is contingent upon the earnings potential of a company's assets The return on assets (ROA) is recognized as one of the key determinants influencing the valuation of a
28 firm The earlier studies conducted by Wirakusuma Yuniasih (2007), and Carlson and Bathala (1997) in Suranta and Pratana (2004) yielded similar findings
In their study, Khatab et al (2011) sought to examine the relationship between the profitability of commercial banks and their liquidity The objective was to enhance comprehension of the effects of effective liquidity management This study posits that there exists a significant association solely between the return on assets (ROA) and the liquid ratio Furthermore, the findings of the aforementioned studies indicate that the return on assets (ROA) can also be influenced by quick ratios and current ratios Previous empirical studies in the literature have revealed that each variable (ratio) exerts an influence on the return on assets, consequently affecting the market value of firms Based on the findings presented, it is possible to formulate a hypothesis suggesting a relationship between return on assets (ROA) and Tobin's Q.
The effect of leverage on firm value
In order to enhance firm value, certain scholars, such as Modigliani and Miller
(1958), have advocated for a consistent escalation in firm leverage, provided that the overall expenses associated with financing debts (encompassing debt-issuing costs, bankruptcy costs, and agency costs) remain lower than the total advantages (such as interest tax shields and reduced agency cost of equity) In accordance with the conventional theory of capital structure paradigm, the association between leverage and the value of the company is represented by a convex curve, indicating the existence of an optimal capital structure where the derivative of the function is equal to zero Several scholars, including Robicheck and Meyer (1966), Hamada
(1969), and Schall (1972), have advocated for the adoption of the equi-marginal
29 principle This principle posits that the value of a firm will increase as long as the marginal benefits derived from leverage exceed the marginal expected costs associated with default According to Kim (1978), when the marginal gain becomes smaller than the marginal cost, there is a decline in the value of the firm
In their study, Gill and Obradovich (2013) conducted an analysis to investigate the influence of financial leverage and corporate governance on the firm value of American companies This study employs a co-relational and causal research design to examine a sample of 333 firms that are publicly listed on the New York Stock Exchange (NYSE) The study spans a period of three years, specifically from 2009 to 2011 The primary outcome of the study revealed a positive relationship between financial leverage, firm size, return on assets, and insider holdings, and the value of American firms Gill et al (2012) incorporated the methodologies employed by Kyereboah-Coleman (2007) and Abor and Biekpe (2007) in their study However, the model's predictive capacity is notably weak, as evidenced by the low R2 value of 0.238 and the adjusted R2 value of 0.219 These results suggest the potential exclusion of relevant variables in the analysis
In their study, Vo and Ellis (2007) conducted an estimation of the relationship between Research and Development (R&D) activities and both capital structure and firm value The researchers examine these relationships across various sectors and time horizons The study employed the sales debt to equity ratio, capital expenditure over sales, growth opportunity, research and development expenses, and advertising expenses as independent variables, while firm value was considered as the dependent variable The findings of this study indicate that capital expenditure has a significant impact on firm value Various regression methods were employed
30 to analyze the data, and the results demonstrate that R&D expenditure plays a crucial role in determining firm value
In their study, Cuong and Canh (2012) examined a sample of 92 firms that consisted of companies listed on two of Vietnam's stock exchange markets during the period of 2005 to 2010 This study utilized a panel threshold regression model to examine the potential impact of capital structure on firm value The authors observed that an optimal debt ratio of 59.27% was identified, at which point the debt ratio (DR), serving as a measure of leverage, exhibited a positive impact on the return on equity (ROE), which serves as a proxy for firm value.
The effect of Growth Opportunity on firm value
In their research conducted in Hubbard and Bromiley (1994) examined the objectives mentioned by top managers in a survey The findings indicate that growth opportunities emerged as the most prevalent objective and a significant factor among the surveyed managers The identification of growth opportunities is a crucial factor in shaping the strategic decisions made by top-level managers within a firm Previous scholarly research has indicated that the market value of a firm is closely linked to this variable According to Kaplan et al (2001), Norton and Kaplan (1992, 1993, 1996) conducted research on these variables and posited that firms should establish a diverse set of goals, including sales growth, in order to effectively achieve the financial objectives of the firm and enhance its market value
According to the research conducted by Carlsson and Eliasson (1994), the planning system of a firm serves the purpose of establishing a tangible and valuable benchmark for managers, with the aim of motivating them This system typically
31 begins by setting sales targets, and it is noteworthy that an emphasis on sales growth is partially linked to the overall value of the firm Growth opportunities are a focal point in the context of Agency theory According to this theoretical framework, sales growth holds significance in terms of the personal advantages it brings to managers Specifically, it enhances cash flow and ensures managerial job security, consequently leading to increased salaries due to heightened managerial responsibilities However, it is worth noting that the theory and associated research have not definitively established a discernible relationship between growth opportunities or sales growth and firm performance
Rumelt and Wensley (1981) conducted a study According to the findings of Rumelt and Wensley (1981), it has been determined that profitability is influenced by growth opportunities, which can be attributed to certain unobserved variables Additionally, there is a correlation between market share growth and returns Merely summarizing the existing body of literature provides an incomplete depiction of the relationship between sales growth and firm value and performance
In a burgeoning industry, it is plausible that the firm may experience a rise in overall sales volume and an expansion of its sales figures However, concurrently, there may be a decrease in the firm's market share The existing body of literature has examined the relationship between sales growth and returns to stockholders, finding that there is not always a direct correlation between the two (Jensen, 1993)
Data description and methodology
Sources of data
This study employs secondary data for the purpose of analysis Analysis typically involves the utilization of both annual and quarterly data The data related to additional variables is obtained from the yearly financial statements of companies The data has been obtained from the subsequent sources:
Websites of companies used in the analysis
Company financial data of Orbis
The financial data of companies originating from four distinct countries will be systematically gathered and classified according to their respective categories The final data to be included in the regression analysis will consist of the calculated values for business value, asset value, return on asset, capital structure, capital expenditure, and fluctuations in cash flow and earnings for each business over a recent 7-year period.
Data description
The primary objective of this study is to investigate the influence of earnings volatility and cash flow volatility on firm value The analysis will be conducted on a sample of 119 non-financial companies that are publicly listed on stock exchanges in Indonesia, Singapore, Thailand, and Vietnam The observed time frame spans approximately seven years, commencing in 2016 and concluding in 2022 Firms that possess incomplete financial data are excluded from the sample due to their
33 inability to fulfill the objectives of the study, as well as the impracticability of applying proxies to incomplete data
The research was conducted across the four leading economies in Southeast Asia, where data was gathered from approximately 30 publicly listed companies in each country The examination of these corporations may partially reflect the attributes of stock markets in individual countries or the broader Southeast Asian region Moreover, it is noteworthy that low-GDP countries exhibit a limited presence of major corporations, indicating a relatively low level of economic openness that has not approached international standards Furthermore, these economies confront significant challenges in the effective functioning of their stock markets This particular research object is considered unsuitable due to its lack of effectiveness, susceptibility to manipulation, and non-compliance with market rules.The primary factors considered as independent variables in this regression model are the volatility of cash flow and earnings The measures of cash flow and earnings volatility in this study are derived by calculating the standard deviation of quarterly earnings per share and cash flow per share, respectively, over a period of seven years The measure used to assess earnings volatility for each firm in 2016 is the standard deviation of quarterly earnings per share across the 28 quarterly observations spanning from 2016 to 2022 Although the approach employed may be considered rudimentary, the susceptibility of my findings to alternative metrics is contingent upon the utilization of alternative time-series models The findings are not influenced by the chosen metric for earnings or cash flow volatility
The remaining variables shall be derived from the annual business results as reported in the enterprises' annual reports The chosen companies in this study are
34 those that are publicly traded on the stock exchange These companies have undergone an audit of their business reports to ensure the objectivity of the results in the model
The dependent variable in this study, denoted as TQ, represents the value of firm i at time t It is determined by calculating the ratio of the market value of equity to the total book value of liability to net assets I have acquired net assets, encompassing both long-term and short-term holdings The valuation of a company is determined by its overall financial worth Furthermore, the calculation has been conducted based on the market capitalization The variable Q serves as a proxy for the valuation of a firm The market-to-book ratio can be employed as a means to compute the variable Q The market value of equity is determined by multiplying the number of outstanding shares by the market price of equity at the end of the fiscal year, and adding the book value of long-term liability This value is then divided by the total assets of the firm, as described by Shin and Stulz (2000)
3.2.2 Independent variables a) Cash Flow Volatility
Cash flow volatility means that cash flow volatility refers to the amount of uncertainty or risk related to the cash flows from operations A higher level of volatility means companies net operating cash flows are highly unpredictable and unstable It means firms can face a dramatic shortage of cash flows over a short period of time in either direction Lower volatility means that cash flows do not
35 fluctuate dramatically and tend to be steadier Cash flow volatility is calculated using the standard deviation of the quarterly cash flow of the company Quarterly cash flow is collected based on net cash flow from operations ((Minton et al., 2002)) There are a minimum of 36 values for each company and a maximum of 60 values First of all, monthly values of quarterly cash flow from operations are taken from the financial statements of the companies Dummy variables are created for each quarter of the firm Then, through the equation, find out the residuals to avoid seasonality because cash flow is persistent and exhibits seasonality After finding out the residuals, find the standard deviation of each year and take the values of Q4 to use as cash flow volatility We can also utilize the coefficient of variation, as in Minton and Schrand, (1999)
CFVt = β1 + β2CFt-1 + β3Quater1 + β4Quater2 + β5Quater3 + β6Quater4 + εt
Volatility of Cash flow = Standard deviation of cash flow’s residual b) Earnings Volatility
EBV is the earnings before tax in interest volatility of i company at the time t Many proxies are used by the researcher to measure earning volatility, but in this study, the standard deviation of quarterly earnings was used Earning volatility means how steady or unsteady the earnings of the firms are The residuals of the quarterly earnings per share, which are estimated using this equation:
EBt = β1 + β2Et-1 + β3Quater1 + β4Quater2 + β5Quater3 + β6Quater4 + εt
Volatility of Earnings = Standard deviation of Earnings’ residual
A comparable model was employed to assess the level of volatility in cash flow In addition to the aforementioned basic time-series model, I also generated residuals by employing alternative time-series models that incorporate additional lags in earnings or cash flows, along with a mean reversion term (Et-4) The utilization of residuals from any of these alternative time-series models for the computation of earnings or cash flow volatility does not fundamentally change any of the outcomes c) Return on Assets (ROA)
Return on assets is a ratio that tells investors about the financial performance of a company It is calculated by using net profit divided by total assets It is also defined as how companies are efficient in using their resources to generate profit
Long-term liabilities include debt obligations that are due more than one year from the firm’s balance sheet date or after the current operating cycle
This item represents the amount that companies are spending to acquire upgrades, enhance the technology of their assets In this expenditure, buildings, equipment, and new projects and investments are included
Capital Expenditure = PPE Current year - PPE Previous year + Depreciation
The asset turnover ratio is a metric used to evaluate the efficiency of a company by comparing its sales or revenues to the value of its assets The asset turnover ratio serves as a metric to assess the efficacy of a company in utilizing its assets to generate revenue
Methodology
Panel data analysis is used when the data has both cross-sections and time series data; the same applies to this study There are three different models used in panel data analysis Each has a different assumption regarding the intercept The first model of the common coefficient has a constant intercept across all cross sections and time periods The second model is the fixed effect model, which describes that the intercept is different for all cross-sections The third one is a random effect model, in which the intercept is different for all the cross sections along with random over time
This study used the least squares method to check the relationship of earnings volatility and cash flow volatility on the value of the firm, accompanied by other variables Initially, log transformations are applied to the variables in order to mitigate the potential influence of outliers on the analysis Furthermore, I employ the practice of standardizing all variables in my analysis by subtracting the sample mean from each variable and subsequently dividing the result by the sample
38 standard deviation Therefore, all regression coefficients are expressed in units that can be compared All of these transformations do not have a significant effect on my findings and are solely conducted for the purpose of ensuring the reliability and clarity of our analysis
(ln)TQit = β0 + β 1(ln)CFVit + β 2(ln)TAit + β 3ROAit + β 4GOit + β 5CSit + εt
(ln)TQit = β0 + β 1(ln)EBVit + β 2(ln)TAit + β 3ROAit + β 4GOit + β 5CSit + εt
(ln)TQit Log of Tobin Q which is the proxy of firm value
(ln)CFVit Log of Cash flow volatility
(ln)EVit Log of Earnings volatility
(ln)TAit Log of Total assets
CSit Leverage ratio (Debt to Equity ratio)
The present study's model is based on prior research conducted by Mahammad Shahid (2018) and George Allayannis (2003) on enterprises in different nations Using this research model, we aim to examine the percentage change in enterprise value resulting from fluctuations in cash flow and corporate income, assuming all other factors remain constant The method of collecting and calculating data from the collected data source for the variables is presented in Section 3.2
The research object includes a diverse range of companies in developing countries, comprising both small businesses and large corporations In order to examine the characteristics of the relationships between the independent and dependent variables, the model will be applied to three distinct groups of research subjects These groups consist of a total of 119 companies, a subset of companies with total assets exceeding 150 million dollars, and a group of small companies representing the remaining businesses
In order to assess the sufficient of the variables and the model, tests will be conducted in all iterations of the model The purpose of conducting tests is to examine whether there exists multicollinearity, autocorrelation, and statistical significance among the independent variables in explaining the variability of the dependent variable.
Data analysis and discussion
Descriptive Statistics
The research sample comprises 119 companies from four countries that possess the most substantial economies in Southeast Asia The analysis of corporate operating performance over a span of seven years (2016-2022) is based on the utilization of three fundamental financial reports that undergo annual auditing Based on the data that has been gathered, the calculation of 7 business indicators will be conducted, which correspond to the 7 variables that have been examined in the model Each variable consists of 833 observations and there are two specific variables, which are EBV and CFV, referring to the degree of earnings and cash flow volatility in the business Both variables are calculated from the available financial data as the
40 primary focus of the research and are calculated from Quarterly data for 7 years of companies
Table 4 1: Descriptive Statistics for 119 companies
Descriptive statistics provides an analysis of the statistical characteristics and patterns exhibited by a dataset, specifically focusing on the behavior of the data panel Table 1 presents the data regarding the independent variables and dependent variables from the years 2016 to 2022 The summary statistics pertaining to Tobin's
Q reveal that the average value for 119 Asean firms is 1.5315 The minimum value of Tobin's Q is recorded as 0.0535, whereas the maximum value is reported as 21.387 Additionally, the standard deviation of Tobin's Q is calculated to be 1.9242 The calculations with regard to cash flow volatility (CFV) are performed using US dollars The mean value for CFV is determined to be 126560.6, accompanied by a relatively substantial standard deviation of 195768.1 The measurement of earnings volatility is determined by observing the fluctuation of the EBIT ratio over a specific period of time The highest recorded value is 45,7163, while the lowest value is 0.2256 The standard deviation of these values is calculated to be 6.5254 The TA presents the ratio of total assets value for each year of each company The mean weight of total assets (TA) is $680 million, with the minimum and maximum
41 values of TA being $99 million and 10.8 billion USD, respectively ROA, which stands for return on assets, refers to a financial metric used to evaluate the profitability of an investment The highest observed value of Return on Assets (ROA) is 2.4297, whereas the lowest observed value is -0.1342 The standard deviation of ROA is calculated to be 0.1081 The mean value of return on assets (ROA) is 0.0781 The field of CS provides an analysis of the capital structure The mean weight of the capital structure (CS) is 1.2049 The standard deviation of CS is 1.0579 The standard deviation of the variable "GO" is calculated to be 0.1598 Additionally, the minimum and maximum values observed for the variable "GO" are recorded as -0.8501 and 1.2849, respectively.
Correlation matrix
Table 4 2: Panel-correlation of variables for 119 companies
Table 2 demonstrates the correlations among the primary variables in the study The present analysis reveals a number of intriguing observations, although caution must be exercised in formulating overarching generalizations due to the limitations inherent in relying solely on univariate statistical measures In line with the findings of Shin and Stulz (2000), a noteworthy observation is made regarding the positive and statistically significant correlation (0.4037) between the TQ and ROA
42 variables It is worth noting that this is the sole variable exhibiting a positive correlation coefficient with the dependent variable within the present regression model In accordance with the proposed hypothesis, it is observed that there exists a negative correlation between firm value and both earnings volatility (-0.0089) and cash flow volatility (-0.1669) The correlation results indicated the absence of any abnormality, as none of the values exceeded 0.8 However, further tests are required to assess the adequacy of the model with the variables.
Multicollinearity check of the independent variables for the period 2016-
Table 4 3: Variance Inflation Factors of the Earning volatility, Cash flow volatility and firm value
When there is a strong correlation between independent or predictor variables, the problem of multicollinearity emerges The regression results may be influenced as a consequence of the interdependence among independent variables, which deviates from their intended impact solely on the dependent variable Thus, the overall outcomes are impacted The variance inflation factor (VIF) is employed to assess the presence of multicollinearity
In the case that the value of the centered variable exceeds 5, the occurrence of multicollinearity arises, necessitating the resolution of this issue prior to the execution of the regression equation The centered value of the variables EBV, CFV, TA, ROA, and GO is found to be less than 5, indicating the absence of multicollinearity concerns in the dataset Simultaneous regression can be performed on these variables.
Result and discussion
Table 4 4: OLS regression results show the impact of Earning volatility and
Cash flow volatility on Tobin Q of 119 companies
The significance of the intercept (p < 0.001) suggests the presence of omitted variables that may affect the outcome This study encompasses a range of variables,
GO 0.139 0.146 0.350 0.341 lnTQ lnTQ lnTQ lnTQ
44 while acknowledging the existence of additional variables that may influence Tobin q, a proxy for firm value, but have not been incorporated into this particular investigation In the first model, the regression analysis was conducted without incorporating independent variables such as cash flow volatility and earning volatility The obtained R 2 value for this model was 23.86% Incorporating of cash flow fluctuations and earnings fluctuations into models 2 and 3, respectively, results in statistically significant findings with a P value less than 0.05 and an increased R 2 index In the fourth model, two additional variables are incorporated, both of which demonstrate a negative relationship between the volatility of cash flow and income, and Tobin Q, as hypothesized
Nevertheless, the regression outcomes for all four models indicate that growth opportunities lack statistical significance, as evidenced by a P-value exceeding 0.05 in each of the four results The statistical findings related to this index also indicate that the company's allocation of resources towards fixed assets has a limited impact on investment sentiment and the market's evaluation of the company's growth prospects within the Southeast Asian market
Similar patterns are observed in models 2 and 4 when conducting regressions on TobinQ volatility and total asset volatility In relation to the TA variable, data is gathered from companies of varying sizes, encompassing a range of asset values from 99,000 thoundsand USD to 10,800,000,000 thounsand USD Consequently, I intend to classify the firms based on their asset size and subsequently conduct regression analysis as part of the study, with the aim of gaining a more comprehensive understanding of the relationship between asset value and firm value in relation to size
The return on assets (ROA) exhibits a statistically significant relationship with Tobin's q, as evidenced by a p-value of 0.000 The coefficient for this variable falls within the range of 2.63 to 2.77, indicating a positive association between ROA and the proxy for firm value This phenomenon is logical, as a high return on assets indicates that a company is proficiently utilizing its assets to generate profits, thereby augmenting the overall value of the business CS ratio has significantly impacted the Tobin-q ratio by having a p-value of 0.000 the coefficient value of CS indicated a negative relationship between TobinQ and CS, as it has a value from - 0.148 to -0.183 The observed outcome aligns with the TobinQ formula, as a higher
CS value indicates a greater emphasis on debt financing for business operations rather than issuing additional shares, resulting in a higher market valuation The market share of the company is comparatively lower in comparison to companies that opt for a capital structure characterized by a higher proportion of equity These findings align with the outcomes of previous research conducted by Allayannis and Weston (2003), as well as Rountre et al (2008)
The coefficients of the lnCFV and lnEBV in all four models are negative, and they exhibit a statistically significant association with a P-value of approximately 0.0000 The obtained outcome aligns with the initial hypothesis that greater volatility in cash flows and corporate income corresponds to increased investment risk in the respective business streams Businesses that experience inconsistent growth over time may encounter challenges in attaining a favorable market valuation for their shares, consequently diminishing the overall worth of the enterprise This negative value, along with the p-value indicates a significant and negative relationship between EBV and Tobin Q Above result is the according to
46 the expectations that volatility in financial statements has a negative impact on firm value align with the result of Trueman and Titman (1988); Brennan and Hughes
(1991); Lang et al (2002); and Badrinath et al (1989); Allayannis Weston (2003)
Table 4 5: The regression results of the impact model of Cash flow and
Earnings volatility on the firm value of 119 companies
Upon eliminating two independent variables, namely GO and TA, the regression model lnTQ was reevaluated using the remaining four variables: ROA, CS, lnCFV, and lnEBV The obtained results were found to be consistent with the data presented in the previous table All of the independent variables exhibit statistical significance and account for the variation in the natural logarithm of TQ, with an R-squared value of 0.2519 With a confidence level of 95%, conducting a statistical analysis
CS -.1597927 0285613 -5.59 0.000 -.2158538 -.1037317 ROA 2.70946 2765905 9.80 0.000 2.166559 3.252361 lnTQ Coefficient Std err t P>|t| [95% conf interval]
Total 753.469139 832 905611946 Root MSE = 82508 Adj R-squared = 0.2483 Residual 563.670964 828 680762034 R-squared = 0.2519 Model 189.798174 4 47.4495436 Prob > F = 0.0000 F(4, 828) = 69.70 Source SS df MS Number of obs = 833
47 to examine the relationship between earnings volatility and firm value reveals that cash flow volatility has a more significant effect on profitability
4.4.1 Regression results for the small business group
There is a noticeable distinction between large corporations and small enterprises Notably, large companies tend to exhibit substantial trading volumes, rendering their stock prices susceptible to market fluctuations Consequently, the consequent impact on firm value is different Furthermore, in order to conduct a more comprehensive analysis, it is necessary to categorize companies into two distinct groups The small firm group, including 38 companies, will consist of entities whose average total assets amount to less than 150 million dollars
Table 4 6: Descriptive Statistics for the small business group
Results derived from the analysis of descriptive statistics indicate that the mean asset value of small enterprises is 61.5 million USD In the interim, the mean volatility of cash flows for this group is approximately 23,512 The standard deviation of the dependent variable was observed to be 2.7689 However, it is worth noting that there was a substantial disparity between the minimum and maximum values, which were recorded as 0.1559 and 21,387, respectively
Variable Obs Mean Std dev Min Max
Table 4 7: Panel-correlation of variables for the small business group
The table above will display the correlation between the variables The correlation coefficients among the variables fall within the acceptable range, with no coefficient exceeding 0.8 or falling below -0.8 In a group of enterprises characterized by small asset values, it is theoretically expected that there exists a negative correlation between the earnings before valuation (EBV) metric and the total quality (TQ) metric However, contrary to this expectation, empirical evidence reveals a positive correlation between the cash flow valuation (CFV) metric and the
TQ metric In order to establish a more precise examination of the association between variables, the Ordinary Least Squares regression outcomes for the group of small enterprises will be subjected to testing These results are presented in the subsequent table
TQ ROA GO CS TA CFV EBV
Table 4 8: OLS regression results show the impact of Earning volatility and
Cash flow volatility on Tobin Q of the small business group
The data groups demonstrate a noteworthy enhancement in the R 2 value, reaching approximately 53%, for small-scale enterprises The statistical significance of the variable lnTA indicates that it is a significant factor in explaining the variation in the value of the firm, as represented by the variable lnTQ, across all four models Nevertheless, the regressions conducted indicate that the fluctuations observed in cash flow and earnings do not possess statistical significance (P-values of lnCFV and lnEBV >0.05) The obtained outcome contradicts the hypothesis posited in the previous section of this study
(5.96) (4.30) (6.04) (4.36) lnTA 0.365*** 0.305*** 0.373*** 0.310*** lnTQ lnTQ lnTQ lnTQ
Table 4 9: The regression results of the impact model of Cash flow and Earnings volatility on the firm value of the small business group
The observed outcome can be elucidated through the application of the behavioral theory of investors In the case of small companies, both the trading volume and the volatility of the company's stock price tend to be relatively low The investment value in stocks of these companies typically constitutes a relatively minor portion, thus often garnering limited attention from the majority of investors Consequently, the volatility of cash flow and earnings is unlikely to exert a significant influence on a company's overall value
4.4.2 Regression results for the large business group
Table 4 10: Descriptive Statistics for the large business group
A group of big corporations comprises 81 entities, each exhibiting an average asset valuation surpassing 150 million USD throughout a span of seven years The findings derived from the analysis of descriptive statistics reveal significant variations in both cash flow and earnings The CFV variable exhibits a standard deviation of 221,080 thousand USD, with a maximum value of 110 million USD
On the other hand, the EBV variable ranges between 0.2256 and 45,7162, with an average value of 6,2389 The dependent variable, which represents firm value, exhibits a range of values from a minimum of 0.0535 to a maximum of 11,378 The mean value of this variable is calculated to be 1.1811, with a standard deviation of 1.2115
Table 4 11: Panel-correlation of variables for the large business group
Variable Obs Mean Std dev Min Max
Conclusion
The present study aims to empirically examine the proposition that fluctuations in earnings and cash flow are associated with a detrimental impact on the overall value of a firm Existing research has indicated that cash flow volatility incurs costs, has a lasting impact on investment decisions, and that effective risk management contributes to value creation However, no previous studies have directly examined the relationship between the smoothness of financial statements and value The significance of this matter lies in its ability to offer a rationale for the extensive involvement of organizations in risk management endeavors
The primary objective of this study is to investigate the influence of earnings volatility and cash flow volatility on firm value This will be accomplished by analyzing a sample of 119 non-financial firms that are listed on the stock exchanges of the four leading ASEAN countries The study will focus on the period spanning from 2016 to 2022 The OLS regression model is utilized for this purpose The measure of earnings volatility is determined by the standard deviation of the residual of the earnings before tax ratio, while cash flow volatility is assessed by the standard deviation of the residual of the cash flow from operating activities The findings of the research demonstrate a statistically significant inverse correlation between the volatility of earnings, the volatility of cash flow, and the valuation of the firm Firms characterized by greater earnings and cash flow volatility tend to exhibit diminished levels of firm value Investors exhibit hesitancy regarding the prospective conduct of firms, leading them to refrain from investing in companies characterized by elevated levels of earnings and cash flow volatility These companies are experiencing significant fluctuations in their earnings, leading to a
58 reluctance among companies, individuals, and institutional investors to allocate their funds towards them According to empirical data from earlier studies, a higher level of consistency in earnings and cash flow reduces the informational advantage that insider management has over external investors The presence of high earnings volatility has been found to have a positive association with negative earnings disclosures This can be attributed to the fact that increased trading volumes in financial markets tend to enhance the level of information available to market participants The practice of informed trading has the potential to mitigate the presence of information asymmetries between individuals with privileged access to information (insiders) and those without such access (outsiders) Over time, this will exert pressure on individuals with privileged access to financial information to ensure that the presentation of financial statements is characterized by coherence and consistency
The second objective is to investigate the association between control variables, specifically firm size, and firm value There exists a negative correlation between size and firm value The relationship between profitability and firm value is typically positive, as companies often generate returns on assets through their profits Therefore, a company's ability to generate substantial profits can serve as a positive indicator to both existing and potential shareholders When a company experiences a decrease in profitability, it will consequently have a reduced amount of cash flow at its disposal This phenomenon directly contributes to a shortage of cash flow, resulting in increased fluctuations in operating cash flows and ultimately leading to heightened cash flow volatility The findings presented here are consistent with prior investigations conducted by Serrasqueiro and Nunes (2008)
59 and Becker-Blease et al (2010), which also examined the relationship between profitability and firm value There exists a negative correlation between leverage and firm value According to Rountree et al (2008), an increase in the debt to equity ratio resulted in an elevated risk for equity holders Consequently, there was a subsequent rise in the return on equity, ultimately leading to a significant decrease in the overall value of the firm
However, when categorizing the data into groups based on companies with large and small average asset values, the outcomes exhibit significant disparities In the case of the group of small enterprises, despite the fact that more than 50% of the independent variables account for the dependent variable, the findings indicate that the variables lnCFV and lnEBV lack statistical significance in relation to earnings volatility and cash flow The concept of volatility does not adequately explain the fluctuations in the value of a firm, whether it increases or decreases It is evident that small firms exhibit a relatively low level of sensitivity in terms of the relationship between their value and cash flow and earnings However, the indicators of Return on Assets (ROA), Current Ratio (CS), and natural logarithm of Total Assets (lnTA) exhibit statistical significance and can effectively elucidate the variation in firm value
In the case of the group of major corporations, all hypotheses are initially supported by the outcomes of the regression model Despite the statistical significance of the regression results for all variables in explaining the variation of the dependent margin, it is worth noting that the R2 value only reaches a modest level of 25-26% The firm value of a large group of companies may exhibit greater sensitivity and be subject to influence from various factors beyond the scope of the model The initial
60 hypothesis posits a negative relationship between the volatility of cash flow and earnings and the enterprise value This relationship can be understood from the perspective of risk management The occurrence of high volatility corresponds to an elevated degree of risk, thereby intensifying investor apprehension and consequently impacting the valuation of the enterprise
Based on the results obtained, it is advisable for companies to monitor fluctuations over a period of time The careful evaluation of multiple factors is crucial in this process This enables the identification of the factors that contribute to the coherence and consistency of financial statements It is imperative to allocate particular attention to the control variables that exert influence on the corporate valuation of non-financial enterprises This study elucidates the impact of volatility in financial statements on the valuation of the firm Maintaining vigilance solely on variables that have an impact on the firm's value can result in time and resource savings for firms when making and implementing decisions When faced with leverage, it is advisable for firms to maintain an optimal debt-to-equity ratio Non- financial firms should take this factor into consideration when making decisions regarding their capital structure