Escolar Documentos
Profissional Documentos
Cultura Documentos
888-893
TI Journals
ISSN:
2306-7276
Zahra Mogharrabniya
Islamic Azad University, Science and Research, shahr-e-QodsBranch, Tehran, Iran.
*Corresponding author: faredanesh2014@email.com
Keywords
Abstract
Forecasting
Forecasting Operatingcash Flows
Forecasting Model
Time Series Model
The importance and necessity of forecasting future cash flows in making economic decisions by brokers,
financial analysts, prospective stock buyers, government, investors, and also credit lenders is clear for
everyone. The aim of this research is to present a suitable pattern for time series forecasting of cash flows
through utilization of some of the economic variables such as growth in gross domestic product, and growth in
industry index. For this purpose four time series models were designed with the following specifications: 1- the
univaraite model containing past growth rates of cash flows, 2- the bi-variate model containing past growth
rates of cash flows and also the growth in industry indices, 3- the bi-variate model containing past growth rates
for cash flows and growth in gross domestic product, 4- the tri-variate model containing past growth rates of
cash flows, growth in industry indices, and growth in gross domestic product. In order to undertake this
research study, the seasonal data for eighty six companies/firms for the time period between 2003 through 2010
were utilized and used to construct the model. Besides, twelve seasonal cross sections for the time period
between 2010 through 2012 were used for forecasting. The resulted forecast values were compared against the
actual values. Based on the findings of the present study, the time series forecasting pattern with three variables
(tri-variate model) showed the least errors, and hence, had the best forecast results and also the best efficiency.
On the contrary, theunivaraite model showed the most errors and also the least efficiency.
1.
Introduction
One of the factors, which have substantial effect in reaching goals, is cash funds. Lack of planning regarding cash funds can lead organizations
to encounter numerous difficulties. In other words, knowing about cash funds or better called cash flows, is not only beneficial to an
organization, but also forecasting it can lead to better planning regarding resources and their expenditure in future years. It must also be
mentioned that investors show greater interest purchasing stocks of firms/organizations with higher cash flows than purchasing stocks of
companies with lower cash flows. It is also worth mentioning that cash flows play pivotal role in many of financial decision makings, securities
valuation models, evaluation of investment plans, and traditional and modern financial analyses. Lenders and creditors, also, place great
emphasis on cash flows for-profit organizations. Cash flows entering/exiting an organization along with capabilities of an organization in
accessing/procuring cash, forms the basis for many decisions and judgments by major groups utilizing financial data/information of these
organizations/firms [18].
Financial reporting should enable users of financial statements to forecast cash flows more precisely. This subject is also clearly stated in the
framework of financial reporting, which determines goals of financial reporting. In numerous related literatures around the world and also
among the professional accounting societies, cash flows and their forecasting is defined as one of the goals of the financial reporting. In the first
statement of the Financial Accounting Concepts of the Financial Accounting Standards Board, it has been stated that the financial reporting
should provide the necessary information regarding amount, time, and lack of certainty of future receipts to help potential investors, credit
providers, and others (The Financial Accounting Standards Boards).
In Standard Number 7, the International Accounting Standards Committee states that the information regarding cash flows should be useful for
entities utilizing financial statements to evaluate the capability of a given commercial firm in generating/procuring cash funds and also their
utilization in required operations. Besides, the decisions of entities utilizing this information should take into consideration the capability of
commercial firm in creation of these cash flows, planning and scheduling, and certainty of generating those [3].
The Iranian Accounting Standards Committee has also stated that making economic decision by users of financial statements requires
evaluation of a given commercial firm in generating cash flows and certainty of such generations. This capability, ultimately, determines the
capacity of a given commercial firm in making payments such as salary and benefits to employees, making payments to suppliers of goods and
services, repayments of loans, distribution of profit among capital provides. The evaluation of potential in generating cash flows is
accommodated through concentration on financial status, financial performance, and cash flows of a given commercial firm and their utilization
in forecasting expected cash flows and evaluation of financial flexibility [2].
Many of the research works utilize accruals, especially profit accruals for forecasting future cash flows. The basic premise for these studies is
that accounting earnings (profits) are a good alternative for future cash flows. However, since they include accrual accounting and are separate
from investment activities, only under certain circumstances (which are rare) expected accounting profits and future cash flows are equal. In
addition, managerial consideration and discretion in choosing commitment procedures tends to lower reliability of profits as an alternative to
future cash flows. Difficulties in predicting future profits and also management manipulations of these profits, have led researchers to forecast
cash flows independently and without considering profits [18]. In order to avoid the expected difficulties of utilizing future profits and also
managerial manipulations in forecasting future cash flows in the present research, historical data are directly used.
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Presenting an Optimum Pattern for Time Series Forecasting of Operatingcash Flows through Utilization of Gross Domestic Product Growth Rates
International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.
2.
Arbitrage pricing theory considers the real return on bonds and stocks a function of several economic variables. Through this pricing policy,
dynamic relationships between macroeconomic variables and stock returns have been studied by Chen et al. (1986), Christopher Gan et al.
(2006), Jakoob and Mudsun (2002), F. Azizi (2007), M. Karim-zadeh (2006), M. Barazandeh (1997). The studies by the above mentioned
researchers are based on this theory that price of a given stock reflect current value of future cash flows of the same stock (the present worth
model). So, it can be claimed that economic variables affect future cash flows, which in turn affect stock prices. By considering the effect of the
macroeconomic variables on expectations of investors, it can be concluded that they also affect stock prices [19]. Based on the result of
investigation made by the authors of this study, no research work was found to consider forecasting cash flows through utilization of
macroeconomic variables. So, the present study is intended to fill the existing vacuum. In this study, it is assumed that since macroeconomic
variables affect cash flows, inclusion of these variables into the forecasting models of the cash flow should lead to better forecast results. It is
also sought to that by inclusion of two variables of gross domestic product and industry index to the previous rates of the operatingcash flows,
and also by taking advantage of multi-variate and mono-variate time series patterns and comparing results of such patterns, the best possible
pattern for cash flows be introduced.
3.
Research background
890
International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.
of models. Finally, addition of short term accrual items (changes in receivable accounts, changes in payable accounts, and changes in
inventories) compared to long term accrual items (depreciation) to the earnings model increases the forecasting capability of cash flows.
In order to evaluate capabilities of two variables of non-discretionary accruals and operating cash flows in forecasting future operating earnings
and cash flows, a research study titled Study of effect of time intervals of financial variables in forecasting operating earnings and cash flows
was conducted by Khadami-pour et al. (2013). The statistical procedure utilized for this research study was correlation and the time period was
from 2005 to 2010. The results showed that there is a meaningful operational relationship between future cash flows and cash and accrual
components of earnings. The relationship with the cash component in present year, and relationship with the accrual component in two year gap
were the highest compared to other time gaps. The finding also revealed that there is a relationship between future operating earnings and cash
and accrual components of earnings. This relationship was the highest at four year gap compared to other time gaps. So, based on finding of this
research, the best forecasting of operating earnings and cash flows can take place in above mentioned time gaps.
Saghafi and Saraf (2012), in a research study titled A model for forecasting cash flows in Iranian firms compared two models of random step
and reverse accrual for forecasting operating cash flows and evaluated some of the characteristics of firms, which affect the forecasting models.
Their results show that the random step model was more capable of forecasting operating future cash flows compared to reverse accrual model,
while the reverse accrual model was more suitable for firms which were under the influence of the government.
4.
Research hypotheses
The first hypothesis: Operating cash flows forecasting capability of the model which takes into account past growth rates and industry indices
growth rates is higher than the capability of the model which takes into account past growth rates.
The second hypothesis: Operating cash flows forecasting capability of the model which takes into account past growth rates and gross domestic
product growth rates is higher than the capability of the model which takes into account past growth rates.
The statistical population
The statistical population of the present research study includes active firms admitted to the Tehran Stock Exchange Organization. With respect
to the nature of the research study and also lack of coordination among firms admitted to the Tehran Stock Exchange Organization, the following
conditions were observed in selecting the statistical population:
1. The firms should be in the industry group (the firms should not ba acting as financial intermediaries or brokers).
2. The firm(s) should be admitted to the Tehran Stock Exchange Organization from 2003.
3. The firms financial information/data for the time period of 2003 till 2012 should be accessible.
4. The firm(s) should not have any financial year changes.
The variables and procedure for collection of data
In order to collect necessary information for the present research study such as becoming familiar with the theoretical basis, accessing
information regarding previous research results, and research history library studies and information obtained from the Internet sites were used.
And for collection of the necessary research data the documents of firms/companies at the Tehran Stock Exchange Organization were used.
Furthermore, software such as Tadbir-pardaz and Rah-avard-novin were used.
The operating cash flow growth: is obtained by subtracting the operating cash flows of the previous period from the operating cash flows of the
current period.
Gross Domestic Product: The gross domestic product or GDP is one of the economic measuring tools, which measures the monetary value of all
the finished final goods and services produced within a country with that country in a specific time period. There are many different methods for
calculating GDP. Production method (total value of everything produced)), expenditure method, and finally income method are the three
common methods of calculating gross domestic product. In this research study, the actual GDP based on rate of production factors is utilized.
Industry Index: The Tehran Stock Exchange Organization calculates price index for each industry, all with the formula similar to the formula for
calculating the total price index. In other words, the firms/companies admitted to the Tehran Stock Exchange Organization are divided into two
groups of industry and finance. The finance group includes all financial broking firms, and the industry group includes all firms/companies
except financial broking firms. The Tehran Stock Exchange Organization calculates price indices for the two groups, which are known as the
financial index and the industry index. Both of these indices follow the total price index in terms of design, calculation, and adjustment.
5.
The present research study is of the applied nature, and since value judgment is not stressed, it is considered a descriptive accounting research.
Besides, with respect to the fact that historical information will be utilized to test hypotheses, it is classified as the quasi-experimental research.
Also, the present study is an empiricist epistemology, its reasoning system is deductive, and from point view of nature of study; field library
study utilizing historical information is causal.
The analysis of data of the present study and testing of hypotheses was done by EXEL and EVIEW 8software, in a manner that the collected
information from sites were first grouped in the EXCEL software, and then transferred to EVIEW 8 software to perform statistical tests.
In general, the forecasting procedure can be seen in the figure 1.
In the present study time series methods have been utilized to forecast operating cash flows. The time series models are a collection of patterns,
which include two main groups of univaraite and multivariate patterns. Auto-regressive (AR), moving average (MA), and auto-regressive
integratedmoving average (ARIMA) are some of the most important univaraite models, and auto regressive distributed lag(ARDL), vector autoregressive (VAR), and vector error correction model (VECM) are among the multivariate models (Husseini et al., 2008).
The first thing to do in utilization of the time series models is to test variables used in the model for being stationary and then the unit root
hypothesis is tested. Then hypothesis of the unit root test based on Dickey Fuller test (ADF) is performed. The results of the unit root test for
level and first difference level of variables are given in Table 1.
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Presenting an Optimum Pattern for Time Series Forecasting of Operatingcash Flows through Utilization of Gross Domestic Product Growth Rates
International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.
Forecasting approaches
Qualitative methods
Quantitative methods
Knowledge and
experience based
Methods based on
model
Figure 1
(Source: Principles of econometrics, Kjrati, Damo)
Dickey Fuller
statistics
-1.40
-3.06
-8.98
Critical values at 1%
significance level
-2.64
-2.63
-3.61
Critical values at 5%
significance level
-1.95
-1.95
-2.94
Table 1 shows that growth rate of cash flows variable is less than the critical values at 1%, 5%, and 10% confidence level. So, the hypothesis test
for unit root is not rejected. In other words, this variable is non-stationary in the model. However, the first difference of the variable and other
variables are stationary. It should be pointed out that the optimal interval in Dickey Fuller test is maximum 9, and hence Schwarz method is
used.
In the univaraite time series models, changing future behavior based on past behavior is modeled and it is assumed that for predicting behavior
of the variable of interest requires no information other than the information contained in the series. Therefore, in contrast to structural model, in
which the dependent variable (y) is explained using explanatory variables (X1,...,Xn), the variable y in these models is explained by using past
values. In estimation of single variable models, the Box Jenkins method is used, which has four stages of identification, estimation, control, and
prediction.
1. Identification stage
At this stage attempts are made to identify the model, or in other words, determine the preliminary values of q and p. With respect to the fact that
it is possible to detect value of q and p by utilizing autocorrelation (AC) and partial autocorrelation (PAC), so the AR(2) component is entered
into the model and values are estimated.
2. Estimation
Based on the partial autocorrelation graph, which represents more than 50% correlation up to two periods of delay among residues, two factors
of MA(1) and MA(2) were added to the model, and the ARIMA (2.1,2( was selected as the final model for estimation of cash flows variable.
The results are shown in Table 2.
coefficient
-0.91
1.32
-0.50
0.85
0.81
3.34
346.
-91.8
81.87
Standard deviation
T statistics
0.76
-1.19
0.13
9.79
0.12
-4.22
Mean dependent variance
S.D. dependent variance
Akaike info criterion
Schwarz criterion
F-statistic
Prob.(F-statistic)
probability
0.23
0.00
0.00
0.52
7.83
5.37
5.59
40.3
0.00
3. Control
At this stage the residual test is used in order to make sure that the model is chosen properly. With respect to the residual correlation diagram, the
autocorrelation and the partial autocorrelation diagrams represent that the present model of ARIMA has the optimal condition, since thru
determination of the appropriate lag or interval, it is observed that each one of the lags or interval are located at one standard deviation.
4. Prediction
The prediction of trend of growth with respect to existing information has been done at the final stage of the ARIMA model. In this model, the
observation process of growth trend of the cash flows variable from 2003 to 2010 for estimation of the model, and from 2010 to 2012 for
prediction has been utilized.
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International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.
Multivariate time series models encompasses procedures, in which it is assumed that one variable cannot be explained only by its past, and there
are other information, which are effective in explaining variables behavior. Multivariate time series models are generally composed of three
models of auto-regressive distributed lag, vector auto-regressive, and vector error correction. Each one of these models indicates specific
behavior of a certain variable and depicts the relationship among these variables (Salami and Jahanghard, 2008).
Probability
(at 5% level)
0.00
0.03
hypotheses
None
At most 1
As the results indicate, there is a co-integration relationship among the threevariables at the 5% level. The co-integration relationship between
dependentvariables indicates that the linear combination of time series is sometimes stationary and at some times non-stationary. Hence, the
problem of existence of spurious regression vanishes.
Now, the VECM model is used to predict the variable. The mathematical model of the VEC< is as follows:
y = +
+ Ey
Where, Ey = y (a + bx ). In the long run equilibrium condition, the correction error is zero. Even though, there was a deviation in the long
run equilibrium, the correction error will not be zero. The coefficients of the equation measure the speed of adjustment of endogenous variables
towards equilibrium. Since the variable for operating cash flows growth has become stationary after a subtraction, the co-integration test is done
to check the possibility of a long term collective relationship among the variables. Obtaining optimum length of lag in estimating for cointegration model by using Johansen-Juseliustest is preliminary to the model estimation, because number of proper and suitable lags in this
model guarantees that the error terms of the equations, and, consequently, the resulting white noise to be stationary or I(O). It is customary that
the same lag length for the equations of the system used, so that the symmetry is preserved. Among the different criteria that are used to
determine the optimal lags, Akaike criterion (AIC, Schwarz-Bayesian (SC), the Hanan Queen (HQ), and also Likelihood ratio (LR) are used.
Based on the output of the software, it can be seen that according toSchwarz-Bayesian criteria(SC),the Hanan Queen(HQ)andlikelihood
ratio(LR)the optimal lag is equal to 2.
Here, it should be mentioned that after the co-integration test and confirmation of existence of long term relationship, three model of VECM
have been estimated.
VECM1 : A multivariate regression model with threevariables was estimated by inclusion of variables for operating cash flows growth, gross
domestic product growth, and industry index growth, and its equations were used to forecast the operating cash flows growth variable.
VECM2 : A multivariate regression model with one variable was estimated by inclusion of variables for operating cash flows growth and gross
domestic product.
In this stage, forecasting of cash flows has been accomplished through utilization of the existing information. Just like the ARIMA model, the
observations from 2003 ill 2011 were used to estimate the model, and twelve seasonal sections from 2010 till 2012 were used for forecasting.
The results of forecasting error models shown in Table 4.
Table 4. Real and estimated values and error in the three variable model
Year
2010:1
2010:2
2010:3
2010:4
2011:1
2011:2
2011:3
2011:4
2012:1
2012:2
2012:3
2012:4
Forecasting error
VECM1
-2.02
-1.30
-0.75
-0.12
-0.44
0.61
0.28
-0.04
1.00
1.77
2.58
2.14
Forecasting error
VECM2
-1.91
-1.16
-1.08
-1.23
-1.52
-0.64
1.196
0.47
1.54
2.19
3.10
0.27
Forecasting error
ARIMA
-3.10
0.26
-1.64
1.11
-0.418
2.39
0.93
2.10
1.56
1.48
1.97
-1.89
MSE
3.086
1.871
2.420
MAE
1.576
1.091
1.363
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Presenting an Optimum Pattern for Time Series Forecasting of Operatingcash Flows through Utilization of Gross Domestic Product Growth Rates
International Journal of Economy, Management and Social Sciences Vol(3), No (12), December, 2014.
As it is shown in Table 7, the efficiency values in forecasting methods using time seriesmodel with three variables are 0.064, 1.091, and 1.871,
which show the least error among the utilized methods. So, the VECM1 has the most efficiency and the best forecasting capability. On the
contrary, the ARIMA model with a single variable has the largest error value, and hence has the least efficiency.
6.
Conclusion
As the results indicate, the multivariate time series forecasting procedure with three variables has the lowest error, and hence possesses the best
forecasting capability and the highest efficiency among the utilized procedures. On the contrary, the single variable ARIMA forecasting
procedure has the highest error, in other words, the least efficiency. Besides, the bi-variate forecasting procedures have relative efficiency. In
addition, the forecasting capability of bi-variate forecasting procedure with the industry index variable is more efficient than the bi-variate
forecasting procedure containing the gross domestic product growth variable.
The results also indicate that the multivariate time series models have a better forecasting capability compared to univaraite time series models.
This finding is in compatible with the findings of Modares and Dianati (2003).
In addition, the results of the present study is compatible with the findings of Kryzanowski and Mohseni(2013) who studied the interest growth
trend and growth rate of cash flows with some of the macroeconomic indices, such as gross domestic product, forecasted production, and some
industry traits by utilization of the ARDL time series analysis. Their findings revealed that the above mentioned variables are capable of
explaining the interest growth rate and cash flows in short periods both at market and industry level, which is in line with finding of the present
study regarding the addition of the macroeconomic indices to the multivariate time series models improves forecasting.
The reason is that the basis for their research rests on the fact that price of a given stock reflects current value of future cash flows (present
worth model) of that stock. In addition, these research works attributethe actual effect of some of the economic variables on stock prices to the
effect of these variables on cash flows. The findings of the present study also show that addition of these variables to the models for forecasting
future cash flows lead to more precise forecast results on cash flows.
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