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The Cash Flow Model with Float: A New Approach to Deal with Valuation and Agency Problems

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Abstract

In this paper we introduce a cash flow model with float to manage core issues in Corporate Finance. The float actually removes current hindrances pervading the standard cash flow model. To start with, we derive the float model and uncover its underlying financial engineering. After that, any investment decision is regarded as a synthetic portfolio made out of a revenue bond financing the investment, and a performance swap acting as a value driver. It is within the performance swap where the float lies and enhances value. Furthermore, extension to valuation is provided taking advantage of the former portfolio approach. Next, the float complex structure is displayed to proceed towards its sources and uses of cash flows. Last of all, we expand upon a normative model which makes the most of the float and spells out how an accountability precept should be functional in redressing agency problems.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): II (1999)
Issue (Month): (November)
Pages: 247-279

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Handle: RePEc:cem:jaecon:v:2:y:1999:n:2:p:247-279

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Related research

Keywords: Cash Flow Float; Agency Problems; Arbitrage; Performance Swap; Revenue Bond;

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References

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  1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  2. Guofu Tan & Justin Yifu Lin, 1999. "Policy Burdens, Accountability, and the Soft Budget Constraint," American Economic Review, American Economic Association, American Economic Association, vol. 89(2), pages 426-431, May.
  3. Rodolfo Apreda, 1999. "A Corporate Finance Cash Flow model with Float," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 142, Universidad del CEMA.
  4. Aswath Damodaran, 1999. "Value Creation and Enhancement: Back to the Future," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-018, New York University, Leonard N. Stern School of Business-.
  5. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(2), pages 117-161, June.
  6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  7. Mann, Steven V & Sicherman, Neil W, 1991. "The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 64(2), pages 213-27, April.
  8. Mark S. Carey & Stephen D. Prowse & John D. Rea, 1993. "Recent developments in the market for privately placed debt," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 77-92.
  9. Howton, Shawn D & Howton, Shelly W & Perfect, Steven B, 1998. "The Market Reaction to Straight Debt Issues: The Effects of Free Cash Flow," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 219-28, Summer.
  10. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
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Cited by:
  1. Rodolfo Apreda, 2003. "THE SEMANTICS OF GOVERNANCE. (The common thread running through corporate, public, and global governance.)," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 245, Universidad del CEMA.
  2. Rodolfo Apreda, 2004. "Corporate Rent-Seeking and the managerial soft-budget constraint," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 283, Universidad del CEMA.
  3. Rodolfo Apreda, 2002. "The Governance Slack Model. A Cash Flow Approach for the Budgeting and Accountability of some Corporate Governance Issues," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 212, Universidad del CEMA.
  4. Rodolfo Apreda, 2002. "How corporate governance and globalization can run afoul of the law and good practices in business: The Enron's disgraceful affair," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 225, Universidad del CEMA.
  5. Rodolfo Apreda, 2011. "GOVERNANCE RISKS. How to measure them by means of the incremental cash-flow model," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 467, Universidad del CEMA.
  6. Rodolfo Apreda, 2008. "Who is the ultimate master of contractual, regulatory, discretionary and residual cash flows? An answer from the standpoint of corporate governance," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 368, Universidad del CEMA.

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