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Consistent Valuation Cash Flow

Listed author(s):
  • Uzi Yaari


    (Rutgers School of Business, Camden, NJ)

  • Andrei Nikiforov


    (Rutgers School of Business, Camden, NJ)

  • Emel Kahya


    (Rutgers School of Business, Camden, NJ)

  • Yochanan Shachmurove


    (City College and Graduate Center of the City University of New York)

This paper seeks to draw attention to a flaw in the firm’s Free Cash Flow model and related statement widely accepted in Corporate Finance. We argue that the common offset of any Current Liabilities against Current Assets distorts the FCF size, composition, and volatility, thereby misstating the firm or project size, debt and assets composition, financial leverage, risk profile, and estimated value. We demonstrate empirically that the offset opens opportunities to manipulate the FCF by systematically overstating its size and understating its volatility. We propose to avoid any offset and rename the standardized statement "Valuation Cash Flow" (VCF).

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 12-009.

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Length: 23 pages
Date of creation: 15 Mar 2012
Handle: RePEc:pen:papers:12-009
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  1. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
  2. Charles E. Wasley & Joanna Shuang Wu, 2006. "Why Do Managers Voluntarily Issue Cash Flow Forecasts?," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 389-429, 05.
  3. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, 08.
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