J. Basic. Appl. Sci. Res., 2(10) , , TextRoad Publication

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1 202, TextRoad Publcaton ISSN Journal of Basc and Appled Scentfc Research Comparng the Effect of Proft Increase Crtera wth the Cash Recovery Rate of Companes Lsted on Tehran Stock Exchange Usng the Stepwse Regresson A. Khosropoor, M. T. Rahmat 2, E. Azzpoor 2 Department of Mathematcs, Islamc Azad Unversty, Frozabad Branch, Frozabad, Iran 2 Department of Economcs, Islamc Azad Unversty, Ilam Branch, Ilam, Iran ABSTRACT So far, two groups of performance evaluaton crtera have been ntroduced for the companes lsted on stock exchange. The frst group contans the crtera based on the accountng proft and the second one contans the crtera based on the cash recovery rate (CRR). The qualty condton of performance evaluaton crtera ncludng ther nformaton content n the comparson stuaton has partcular mportance. In the other words, the ndcator, whch has more nformaton content, wll have hgher prorty n the performance evaluaton. Ths study studes whether the assessment crtera of company performance based on the cash recovery rate have better nformaton content n order to explan the economc performance of company compared to the performance evaluaton crtera of company based on the proft. In ths research, the return on assets (ROA), as the agent of evaluaton performance based on the proft, and the estmated nternal rate of return (EIRR), as the performance evaluaton crtera based on the cash recovery are tested emprcally. Furthermore, two benchmark patterns of stock return and Q Tobn are used n order compare two above performance crtera. Informaton content of EIRR and ROA has been tested n two short tme perod as the transverse secton of corporate performance for two separated years and long term perod as the tme seres of multple consecutve years. KEYWORDS: Cash recovery rate (CRR); Q Tobn; Performance Evaluaton INTRODUCTION Nowadays, n our country the stock s consdered as the organzed money market whch s able to drect the fnancal and monetary resources for comprehensve development and provde the captal needs of small and large companes lsted n t as well as preventng from the nvason of wanderng captal for ganng the hgher proft and return. In the other words, the stock s consdered as the relable and fundamental support for the country cultural and socal economc development. Therefore, the performance of companes lsted on stock exchange and ther performance ratng have specal mportance from the stock attendants' vewponts ncludng the mcro and macro nvestors and CEOs. Investors, credtors, government and CEOs need to know the condton of corporate comparatve performance and the bass of many decsons nsde and outsde the organzaton are done based on t. Therefore, havng the knowledge of performance evaluaton crtera of companes and achevng a crteron, whch ncludes the further and more mportant nformaton for comparng the companes, are the fnancal experts' today concerns. The economcs, accountng and fnancal researchers are nterested n measurng and defnng the best economc performance evaluaton method of actve frms on the stock market. In fact, the most approprate crteron for measurng the economc performance of frms s the nternal rate of return whch s naturally nvsble based on the accountng data and we should replace ths crteron. Based on the tradtonal methods of corporate performance evaluaton, the accountng rate of return has been used as the representatve of nvsble nternal rate of return (IRR). Thus the nformaton avalable n the accountng data has had an mportant role n the expermental tests. Research hstory Data of ncome flow and cash flow, whch are obtaned from the publshed accountng data, are used for the performance measurement and evaluaton. Based on the studes conducted by "Chrstne Andrew, 200; Are Volkan, 200" and unlke the wdespread studes, whch are conducted about the nformaton content of accountng rate of return, the response to ths queston whether the crtera of performance evaluaton based on the ncome flow are superor than the performance crteron based on the cash flow stll has been remaned wthout any result. "A. Draghma and Zahran M. 200" compared these two crtera wth the panel method n Palestne. "Satsh Kumar, A. Sharma, 20" proved the superorty of operatng cash flow about the companes lsted on Inda stock exchange. Cash recovery rate (CRR) s a newer approach to estmate the economc performance of companes. Lke the crtera for performance evaluaton based on the ncome flow, CRR s also estmated usng the fnancal and *Correspondng Author: A. Khosropoor, Department of Mathematcs, Islamc Azad Unversty, Frozabad Branch, Frozabad, Iran, Emal: a.khosropour@gmal.com 9822

2 A. Khosropoor et al., 202 accountng data. Chen and Lee (999), who frst used the correlaton analyss of performance evaluaton crteron for CRR and ROI wth the benchmark "Q Tobn", found that the crteron CRR has shown greater superorty and accuracy than the ROI. The expermental results of prevous studes have shown that the estmated nternal rate of return (EIRR) has hgher explanatory power than ROI for the benchmarks of Q Tobn and stock returns. Moreover, the strength tests of performance evaluaton crtera show that the EIRR has hgher relatve and growng power than the ROA for predctng (Francs (200) and Mlan (200)). Informaton content of EIRR and ROA has been the researchers and analysts' another topc of nterest. Performance evaluaton crtera based on the ncome and cash flow have been wdely used n the fnancal analyss. Despte the fact that the prevous studes suggest that the EIRR and ROA measurement crtera have both addtonal nformaton, whch are very helpful for prvate and publc decson-makers, ths nformaton helps the legslators and governors to dfferentate the stronger companes from other companes and support and encourage them. In addton, recevng the nformaton surplus of dvdends and ganed revenue, the shareholders wll be able to make the more proftable decsons. Accountng Rate of Return The accountng rate of return has been used as the alternatve and non-vsble ndcator for the performance evaluaton of alternatve enterprses. Durng the past years, serous dscussons have been suggested about the nformaton content of accountng rate of return n the expermental research. The researchers, who beleve that the accountng rate of return contans lttle nformaton about the economc performance of frms, are dvded nto two groups. The frst group ncludes those who have succeeded n dstngushng the aspects of economc and accountng rates of return. (Kay (976), Lvngston and Salomon (970) and Pesnel (982)) Based on the vew of ths group, there s a smple relatonshp between the accountng and nternal rate of return and t can smply extracts the nternal rate of return based on the accountng data. The second group beleve that the nvsble nternal rate of return can be used n the form of cash recovery rate and as the alternatve to the accountng rate of return (Gordon and Hummer (988), Grner and Stark (988), Ijr (978) and Stark (987 and 989). Cash Recovery Rate (CRR) Kans (200) and Lep (200) created a new method for evaluatng the performance based on the cash flow. These two suggested that the economc performance of a company can be evaluated by the estmated cash recovery rate as the estmaton of the economc effcency rate. Ijr frst defned the cash recovery rate compared to the cash flow from the operatons, cost of proft, captal sales, asset sales, machnery and equpment to the whole company assets. Bllng (2009) notes that s t possble the cash recovery rate to be estmated from publshed fnancal and accountng documents when a company has several nvestment sources? Lee and Stark (987) ndcated that the cash recovery rate ntroduced by Ijr (978) s conceptually consdered as a good ndcator for the company nternal rate of return, but the nformaton ganed from the publshed fnancal documents are not a good source of cash recovery rate. Therefore, the expermental results of calculated cash recovery rate are not consstent wth the theoretcal prncples presented by Ijr. Thus, Lee and Stark (987) suggested that a cash flow converson should be used for calculatng the cash recovery rate. So the cash recovery rate s equal to the total rato of cash flows to the total stable and gross assets of company. Therefore, two approaches have been formed by two groups of researchers n order to calculate the cash recovery rate. The frst group of Ijr followers ncluded Gordon and Hummer (988) and Salomon (982), who used the captal wth the concept proposed by Ijr and the dscrete perod of tme, and the second group ncluded Lee and Stark (987) who used the concept of actve nvestment and contnuous perod of nvestment. Relatve and ncremental nformaton content of the performance evaluaton crtera Unlke numerous emprcal studes, whch have been conducted n order to calculate the cash recovery rate, few studes have been compared the nformaton content of cash recovery rate wth the accountng rate of return. Chen and Lee's study (995) s the frst study whch evaluates the nformaton content of cash recovery rate measurement crteron based on the cash flows. Usng the correlaton coeffcent, ths study measures the nformaton content of stock rate of return wth other crtera of cash recovery rate on a benchmark Q-tobn n tme perod The results of ther research ndcate that the cash recovery rate has more nformaton content than the stock rate of return. Hejaz and Jafar (385) has also determned the nformaton content of accountng varables n companes lsted on Tehran Stock Exchange n the perod They have appled the dependent varables of net proft, operatng proft, operatng cash flows and the dependent varable, the annual returns of stock as the effectve factors. The results of the research ndcate that compared to two other varables the operatng proft has relatve more nformaton content and the operatng and net proft have more ncremental nformaton content nformaton than each other. However, the operatng cash flow does not have the ncremental nformaton content compared to two other varables. Tme perod s one of the effectve factors on measurng the ndcators whch determne the performance. Decu (994) suggested that n the short-term the measurng ndcators based on the ncome are superor that the 9823

3 measurng ndcators based on the cash flows. He also stated ths s because of the fluctuatons n the cash flows arsng from the operatons, nvestng and fnancng sources. In the other words, the cash flows wll be dfferent from factors such as the accountng correctons, payments maturty, and other smlar factors n the short and long term. Research Hypotheses The man hypothess: the nformaton content of estmated nternal rate of return (EIRR) s hgher than the return on assets (ROA) crteron for evaluatng the performance of companes. Null hypothess: the nformaton content of EIRR s less than the ROA crteron for evaluatng the performance of companes. Frst hypothess: the nformaton content of EIRR s hgher than the ROA crteron for evaluatng the performance of companes. Subsdary hypothess: the nformaton content of EIRR s hgher than the ROA crteron for evaluatng the performance of companes n the long term. Null hypothess: the nformaton content of EIRR s less than the ROA crteron for evaluatng the performance of companes n the long term. Frst hypothess: the nformaton content of EIRR s hgher than the ROA crteron for evaluatng the performance of companes n the long term. By arsng ths hypothess ths ssue s dscussed whether the EIRR provdes more nformaton compared to the ROA for evaluatng the performance of companes? By confrmng ths hypothess, the crtera based on the cash recovery rate of EIRR compared to the ROA based on the proft helps the nvestors to make decsons. Research varables and the way for measurng them Q-Tobn Index Ths ndcator was presented by James Tobn n 968 and ndcates the value of company. Q Tobn s the rato of market value of company to the book value or the replacement value of company assets. Snce obtanng the replacement value of company assets s dffcult and often mpossble accordng to the nformaton contaned n the fnancal statements and stock reports, the book value * of company assets s used n the denomnator and the company market value, whch obtaned from the sum of market value of stock and book value of debt, s used n the numerator. Hence, Q-Tobn s calculated from the followng formula: M. V. S BV.. D - TQ B. V. A In whch: Market value of stock (M.V.S) = s the Market value of common stock whch s calculated from multplyng the stock prce by the amount of common stock. Book value of debt (BVD) = s the book value of debts and s consstent wth the value of debts n the fnancal records. Book value of asset (BVA) = s the Book value of Assets whch s consstent wth the value of assets n the fnancal records. In ths study, the Q Tobn ndex s used as a benchmark for comparng two crtera of EIRR and ROA. Return of Stock (RET) Return of Stock s one of the dependent varables, whch are appled n measurng the company performance lke the proftablty ratos, and s calculated as follows: The prce of common stock n the frst-perod / receved cash dvdend + (prce of common stock n the frst perod - prce of common stock at end of perod) = RET Return on Assets (ROA) ROA ndcates the amount of management effcency at applyng the exstng resources n order to obtan the proft and s one of the proftablty ratos. Ths rato s appled n order to evaluate the company performance and s obtaned accordng to the followng formula: Net proft dvded by total asset = return of asset Net proft ROA Total Asset * - Book value: s one of the accountng concepts by whch the value of each of the asset tems are determned based on the hstorcal data recorded n the fnancal records. - Market value: s the prce of sellng the assets n the market. 9824

4 A. Khosropoor et al., 202 Estmated nternal rate of return (EIRR) Estmated nternal rate of return s a crteron for evaluatng the corporate performance and the cash recovery rate (CRR) s used n order to calculate t; n fact the EIRR s derved from the CRR. Accordng to the studes conducted by Ijr ( ) t s calculated from the followng formula: Gross Assets / cash recovery = CRR Interest cost + revenues from sales of long-term assets + Funds from operatons = cash recovery + declne n current assets (f possble) + average of begnnng and end of perod (accumulated deprecaton + total assets) = Gross Assets We need the annual growth rate (G) of nvestment n the company and the actve nvestment perod (T) n order to extract the EIRR from the CRR. Based on the Salomon's fndngs, T s calculated as follows: T = Gross Assets / Deprecaton expense Based on the studes conducted by Lee and Stark (987), G s calculated by the followng formula: G = log (Gross fxed Assets at the end of perod / Gross fxed Assets n the begnnng of perod) / Study perod Now, n order to obtan the EIRR from the CRR based on Grner and Stark model (988) we have: GT T CRR(G T )( e )(e ) GT G(e )( T ) CRR = Cash recovery rate G = Annual growth rate of nvestment n the company = 22.7 = EIRR T= Actve nvestment perod GT e T e = Natural logarthm of growth rate n the actve nvestment perod = Natural logarthm of nternal rate of return RESEARCH METHODOLOGY Snce ths research focuses on the relatonshps among the varables, t s a knd of correlaton and postevent studes. The evaluaton of relatonshps among the varables s the objectve of these knds of research and data are collected and analyzed from the envronment, n whch they have been exsted naturally, or from the past events whch have been occurred wthout the researcher's drect nterference. The model for predctng the stock return and way of enterng the short-term and long-term fluctuaton varables of operatng cash flows are descrbed below. Research Model In many statstcal studes, two or more ndependent varables are consdered except one varable. Snce n ths research, the study of two or more ndependent varables s consdered, the multple regresson models are used n order to analyze the results as follows: The followng models are used n order to test the hypothess. TQ orret EIRRorROA LEV Sze Rsk Reg TQ e o TQ orret EIRR ROA LEV Sze Rsk Reg TQ o e 2 TQ In whch, s the Q Tobn for the company n the study course; ROA s the Return on assets for the company n the study course; EIRR s the estmated nternal rate of return whch s derved from CRR for the company ; RET s the return on stock for the company I n the study course; and the control varables are the varables whch affect the corporate performance. In ths study, the varables for controllng the leverage power (LEV), Sze of company and rsk, regulatons effectve on the relatve ndustry (Reg), and the delay varable whch s the dependent varable wth the delay of a perod ( TQ ) are consdered. Statstcal populaton, samplng method, and sample sze Statstcal populaton of ths research contans the companes lsted on Tehran Stock Exchange. In order to determne the sample sze frst t should be examned whether the nformaton of ths company s avalable or not. After the surveys conducted about the sample selecton, 53 companes were selected as the samples for a 9- year perod ( ) n a best condton. In the next steps, the followng condtons have been mplemented: - End of fnancal perod should be ended on 2/29. 2 It should not be one of the nvestment companes. 3 - It should be lsted on Tehran Stock Exchange before

5 4 - It should not have fscal changes durng the studed perod. 5 The transactons should be non-stop durng the studed perod. 6 The stock should be traded n a four-month perod after the end of year. Informaton Collecton and Analyss Method The lbrary method has been used n ths study n order to develop the research lterature and background. Data needed for testng the model by a lbrary method are provded from the nformaton databases of Rahavard Novn and Tadbr Pardaz and the requred data are collected from the archve of Tehran Stock Exchange. In order to dentfy the nfluence of ndependent varables on the dependent varable, the correlaton coeffcent Pearson and sgnfcance test of correlaton among the varables and the ANOVA method and t- statstcs have been used. In addton, for testng the hypotheses the Lnear Regresson Model by the Ordnary Least Squares (OLS) method have been used. The stepwse method s used n order to select the varables n the regresson model. Ths method s used because n case that there are a large number of ndependent varables, usng the methods, whch consecutvely determne the presence of ndependent varables n the model, s very useful. Ths method s more cost effectve than all possble regressons based on the calculatons. Moreover, t specfes a good set of ndependent varables whch should be exsted n the model. Ths method essentally develops a sequence of regresson models, so that n each step t s determned that whch varable s removed from or added to the model. The crteron for removng from or addng the varable to the model can be obtaned by reducng the total square error of partal correlaton coeffcents and Fsher statstcs. DATA ANALYSIS Data Analyss s provded n two sectors of descrptve and nferental statstcs. In the sector of descrptve statstcs, the central ndcators (Maxmum, Mnmum, and Mean) and the dstrbuton ndex ncludng the varance and standard devaton have been studed. Moreover, accordng to the mportance of data normalty, the normalty of all dependent varables has been studed usng the Kolmogorov Smrnov test. The results ndcate that the dstrbuton of research varables has been normal and at an acceptable. Table : Descrptve statstcs of research varables Varable Samples count Mnmum Maxmum Average Devaton Varance EIRR ROA RET Q-tobn RISK SIZE LEV Table 2: Kolmogorov Smrnov test for evaluatng the normalty of varables RET Q-Tobn Total samples Average Standard devaton Absolute value of dfference Postve value of dfference Negatve value of dfference Test statstc Sgnfcant RESEARCH FINDINGS Frst, we consder two followng models n order to compare the crteron EIRR wth the crteron ROA on the dependent varable Q-Tobn: - Frst model Qt o EIRR 2 LEV 3 Sze 4 Rsk 5 Re g 6 Q t e Table 3: Correlaton coeffcents among the varables of frst model EIRR RISK SIZE LEV REG Q-tobn (t-) Q-tobn Correlaton coeffcent Sgnfcant Total samples

6 A. Khosropoor et al., 202 Table 4: Stepwse regresson results for the frst model Sgnfcant T-statstcs Standard error Coeffcent Varable Constant EIRR RISK SIZE LEV REG Q-tobn (t-) F statstcs 0.42 Coeffcent of determnaton 0.0 Sgnfcant 0.46 Adjusted coeffcent of determnaton.72 Durbn-Watson.544 Standard error - Second model Q t o ROA 2 L EV 3 Sze 4 Rsk 5 Re g 6 Q t e Table 5: Correlaton coeffcents among the varables of second model ROA RISK SIZE LEV REG Q-tobn (t-) Q-tobn Correlaton coeffcent Sgnfcant Total samples Table 6: Stepwse regresson results for the second model Sgnfcant T-statstcs Standard error Coeffcent Varable Constant ROA RISK SIZE LEV REG Q-tobn (t-) F statstcs Coeffcent of determnaton 0.0 Sgnfcant Adjusted coeffcent of determnaton.858 Durbn Watson.522 Standard error Then, we consder two followng models for comparng the crteron EIRR wth the crteron ROA on the varable RET: - Thrd model RETt o EIRR 2LEV 3Sze 4Rsk 5 Re g 6 Rett e Table 7: Correlaton coeffcents among the varables of thrd model EIRR RISK SIZE LEV REG RET (t-) RET Correlaton coeffcent Sgnfcant Total samples Table 8: Stepwse regresson results Sgnfcant T-statstcs Standard error Coeffcent Varable Constant EIRR RISK SIZE LEV REG RET (t-) F statstcs Coeffcent of determnaton 0.0 Sgnfcant Adjusted coeffcent of determnaton.86 Durbn Watson 7.40 Standard error - Fourth model RETt o ROA 2 LEV 3 Sze 4 Rsk 5 Reg 6 Ret t e Table 9: Correlaton coeffcents among the varables of fourth model ROA RISK SIZE LEV REG RET (t-) RET Correlaton coeffcent Sgnfcant Total samples

7 Table 0: Stepwse regresson results Sgnfcant T-statstcs Standard error Coeffcent Varable Constant ROA RISK SIZE LEV REG RET (t-) F statstcs Coeffcent of determnaton 0.0 sgnfcant Adjusted coeffcent of determnaton.90 Durbn Watson Standard error In the last step, we study the above models for the frst year and last year of study. Begnnng of 200 s the frst year of study: Table : Frst model for the year 200 Durbn coeffcent of Sgnfcant Coeffcents of Sgnfcant correlaton Model Dependent Watson determnaton varables coeffcent varables varable EIRR Q-tobn RISK SIZE LEV Q-tobn (t-) Table 2: The second model for the year 200 Durbn Coeffcent of Sgnfcant Coeffcents of Sgnfcant Correlaton Model Dependent Watson determnaton varables coeffcent varables varable ROA Q-tobn RISK SIZE LEV Q-tobn (t-) Table 3: Thrd model for the year 200 Durbn coeffcent of Sgnfcant Coeffcents of Sgnfcant correlaton Model Dependent Watson determnaton varables coeffcent varables varable EIRR RET RISK SIZE LEV RET (t-) Table 4: Fourth Model for the year 200 Durbn coeffcent of Sgnfcant Coeffcents of Sgnfcant Correlaton Model Dependent Watson determnaton varables coeffcent varables varable ROA RET RISK SIZE LEV RET (t-) Fnally the year 2009 s consdered as the frst year of study: Table 5: Frst model for the year 2009 Durbn coeffcent of Sgnfcant Coeffcents of Sgnfcant Correlaton Model Dependent Watson determnaton varables coeffcent varables varable EIRR Q-tobn RISK SIZE LEV Q-tobn (t-) Table 6: Second Model for the year 2009 Durbn coeffcent of Sgnfcant Coeffcents of Sgnfcant correlaton Model Dependent Watson determnaton varables coeffcent varables varable ROA Q-tobn RISK SIZE LEV Q-tobn (t-) 9828

8 A. Khosropoor et al., 202 Table 7: Thrd Model for the year 2009 Durbn coeffcent of Sgnfcant Coeffcents of Sgnfcant correlaton Model Dependent Watson determnaton varables coeffcent varables varable EIRR RET RISK SIZE LEV RET (t-) Table 8: Fourth Model for the year 2009 Durbn Coeffcent of Sgnfcant Coeffcents of sgnfcant Correlaton Model Dependent Watson determnaton varables coeffcent varables varable ROA RET RISK SIZE LEV RET (t-) Concluson Several groups ncludng the nvestors, fnancal supporters, managers, banks and polcy makers are wllng to evaluate the company performance. The evaluaton crtera are defned as two dfferent groups based on the vews of two groups ncludng the accountants and economsts. Frst group ncludes the corporate performance evaluaton crtera based on the cash recovery rate and the second group ncludes the corporate performance evaluaton crtera based on the proft. The objectve for preparng these ndcators s to explan the economc performance of company whch has the nformaton content of these ndcators. The present study has examned the ncreasng and relatve content of two evaluaton competng crtera for explanng the performance of company n the form of two varable of stock return and Q Tobn by usng the data of 56 companes lsted on the Stock Exchange about the above evaluaton crtera and by applyng the tme seres data durng and cross sectonal data n two perods of 200 and Partcularly, the nformaton content of these two ndcators s examned by usng the varable of return on assets, whch s a performance evaluaton crteron based on the ncome, and the estmated nternal rate of return crteron whch s a crteron based on the cash recovery rate. In the descrptve test of data, the shockng behavor n the varables of estmated nternal rate of return and rsk n 2005 and also the varables of fnancal leverage and stock returns for the year 2006 are dentfed. The behavor of frst two varables s the evdence for the presence of a systemc change, whch s affected by an exogenous varable, on the stock market. Ths change was the presdental electon n However, n 2006 the secondary effect of electons was the change n macro-economc management of country and ts effect was on the stock return and fnancal leverage. Change of ths process and affectng the model was done by a dummy varable for the tme perod after Two benchmark models of stock return and Q-Tobn were used n order to compare two above performance crtera. Present study approves all research hypotheses based on the effectveness of asset rate of return compared wth the estmated nternal rate of return n the long term. But n the short-term the hypotheses based on the ncremental nformaton content of ncome ndex or asset rate of return compared wth the estmated nternal rate of return were not confrmed. In order to compare the evaluaton crtera of lsted companes on the stock exchange, two dependent varables of stock return and Q-Tobn have been used n two regresson equatons. Moreover, the controllng varables were used for ncreasng the valdty of model and mprovng ts specfcaton. These varables nclude the fnancal leverage, rsk, sze of company, dummy varable, and delay varable (dependent varable wth a tme delay perod). The dummy varable was used n order to consder the structural falure n the data process and the effect of changes n macro management system of country ncludng the changes n the management of stock exchange and more mportantly the presdent electon n 2005 and ts effects on the performance of companes lsted on the Stock Exchange n However, all the control varables n the estmated model became sgnfcant by usng the long term tme seres data and wth the postve expected sgn, except the varable of fnancal leverage n the model wth the Q- Tobn varable; the control varable of frm sze and the dependent varable wth a delay perod were not sgnfcant compared to the dependent varable of stock return and were elmnated from the model. However, n the short term the dependent varable wth a delay perod became sgnfcant n the short and only for the year 200 and n the model wth dependent Q-Tobn, and for other models and also for the year 2009, none of the control varables were not sgnfcant. The results of research confrm all the hypotheses and ndcate that the nformaton content of evaluaton crteron based on the ncome s ncremental and has more nformatve compared wth the crteron of cash recovery rate. 9829

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