Effect of maintenance of expected cash on efficiency and future performance in accepted companies in Stock Exchanges of Iran

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1 Inernaional Research Journal of Applied and Basic Sciences 13 Available online a ISSN 1-838X / Vol, 6 (11): Science Explorer Publicaions Effec of mainenance of expeced cash on and fuure performance in acceped companies in Sock Exchanges of Iran Nina MolaZeinali 1, Javad Bakhiari, Mohammad Bakhiari 3 1. Professor of universiy of Islamic Azad Universiy-Karaj Uni. Faculy member of Islamic Azad Universiy-Karaj Uni 3. Molana faculy member of non-profi insiuion of high educaion-abeyek-qazvin Corresponding Auhor n_boshra@yahoo.com ABSTRACT:This research verifies relaionship beween he deviaion of cash held wih and fuure performance. In fac, he purpose of his research is verifying ha, if deviaion of expeced cash reduces he fuure performance. Also his research is verifying ha if he impac of negaive deviaion is more han posiive deviaion or no. The panel mehod is applied o es research hypoheses and 84 companies' daa are applied for he period from 3 o 11. The resuls show ha, he deviaion of expeced cash leads o reduce he fuure performance and also he effec of negaive deviaion is more han posiive deviaion. Keywords: cash held, fuure performance, Panel mehod, posiive deviaion, negaive deviaion. INTRODUCTION The companies for heir consumpions needs cash funds which depend on he company's requiremen level. Under his condiion, he companies need o mainain accepable level of cash. If he mainenance level is less han expeced and necessary amoun for company, managemen is obliged o financing for supplying plans and projecs which impose coss including ineres cos o company and he consequence of increasing he ineres expenses is reducing profiabiliy and of company ha leads o increase capial coss (Harford, 1999). On he oher hand, mainaining he surplus levels on company's requiremens impose he company o bear he los of opporuniy cos. I means ha, in case of no using cash for new invesmens, he company will lose is opporuniy and his issue leads o reduce profiabiliy (Sulz, 199). So mainaining an accepable and economic level of cash in company and liquidiy managemen is one of he facors affecing on company's profiabiliy ha maximize shareholders wealh and oherwise cause lack of managemen in company and finally, shareholders are losses. So he purposes of his research are as following: 1) Verifying he effec of cash deviaion from he expeced rae on fuure performance of company. ) Verifying he effec of posiive and negaive deviaion on fuure performance of company. I's needed o menion ha, he resuls of his sudy are applied for sudens, eachers' universiy, invesmen companies, execuive and financial managers, invesors and financial analyss, sock exchange, banks and financial and credi insiuions and his maer is considered as an applicable purpose. Theoreical research basics Performance evaluaion crierions The performance measuremen crieria are devised in accouning and economy in erms of accouning conceps and economic conceps. In accouning crieria, he company's performance is evaluaed according o accouning daa, while in economic crieria; he company's performance is evaluaed according o power of profi of asses and, poenial invesmens and by considering he rae of and capial cos. Accouning crierions Generally, he company's performance is evaluaed by using of hisoric informaion in he basic financial saemens and noes. Some of hese crierions include:

2 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 Profi of per share Efficiency rae of shareholders righs Efficiency rae of asses Ne profi margin Raio of marke value o book value Q Torbin raio (Bradshaw e al, 6). Economic Crierion Economic value added Marke value added Adjused value added (Bradshaw e al, 6). Relaionship beween profiabiliy and liquidiy Liquidiy and profiabiliy are wo imporan issues for financial hinkers and financial managers of companies. Of course, liquidiy is imporan and qualified for someone and hey believe ha if a company is no profiable, is sick and in case of liquidiy shorage is declining. In oher word, if a company is no profiable can coninue o survive bu wihou liquidiy can coninue o survive. Liquidiy managemen is one of he main opics of financial managemen of companies. Liquidiy shows he company s abiliy o do is shor-erm commimens. In oher word, company s liquidiy is he relaionship beween cash funds ha company posses for a shor-erm and also company requires he cash (Sloan, 1996). Main facors on mainaining he cash by companies Ne profi Profiabiliy shows he healh of economic enerprise and power of liquidiy show economic enerprise survival. So companies ry simulaneously o increase heir liquidiy and heir profiabiliy. I is expeced ha, he companies ha heir ne income is more han oal asses, heir money supplemens is more han heir oal asses. Opler and his colleagues (1999) concluded ha, he companies who have perform beer and heir managers maximize shareholders wealh; rae of heir cash is more han he rae which is required heoreically (Opler e al, 1999). Dividend profi Whaever he dividend profi increase, i s needed o accumulae more liquidiy for paymen. So i is expeced o imagine a posiive relaionship beween devised profi relaive o oal asses and mainenance of moneary supplemens. To avoid lack of liquidiy, he companies mainain more cash balances o pay dividend profis (Hillegeis e al, 4). Cash equivalen asses (receivable accouns, commodiy and ) Cash equivalen asses such as receivable accouns and commodiy sock are considered as a subsiue for companies cash. I means ha, when cash is needed in order o use of invesmen opporuniies or repaymen of debs wih high speed and low cos, he companies can conver such asses ino cash. Based on his issue, he raio of cash o oal asses will be reduced by increasing he raio of cash equivalen asses o oal asses of company. Keeping he money supplemens by companies has an inverse relaionship wih cash equivalen asses and curren asses of company. The resuls of his sudies show ha, he companies can use of curren asses as a subsiue for cash (Ibid). Proceeded sudies Li and Koeen (9) verified he relaionship beween mainaining expeced cash fund and fuure performance of company. The resuls show ha here is a posiive and significan relaionship beween deviaion magniude and magniude of performance changes. Also hey sudied he direcion of hese deviaions and he resuls showed ha he performance improve wih posiive deviaions and will be weaker wih negaive deviaions (Koeen and L 9). Jen and Ling (9) in anoher sudy verified he effec of excess in invesmen on final value of cash. The resuls of his sudy show ha, he cashes are evaluaed wih discoun for shareholders in companies ha have invesed in excess and in oher hand, he resuls of his sudy confirm he second hypohesis and saes ha here is a negaive relaionship beween he size of excessive invesmen and final value of cash (Jen and Ling, 6). Also Solan and Trowal (8) in heir sudy called impac of he qualiy of financial reporing o mainain cash for he period from 199 o 1 showed ha he companies wih high qualiy of financial reporing cause o reduce informaion asymmery.also he achieved resuls of his sudy cause o 168

3 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 reduce he mainained cash incompany, simulaneously wih increasing he amoun of bank deb and he larger companies mainain more cash (Solan and Trowal, 8). Vahap (1) in anoher sudy, concluded ha whaever he ne capial in working is more, he company s curren asses (excep for cash) is more han curren debs (excep for ax payable), so here is less concern o repay he debs. In oher word, company posses enough curren asses (excep for cash) o repay he curren debs ha can use i o repay he debs when needed. So, ne working capial is considered as a subsiue for cash and a company by assuming all oher consan facors, mainain less cash when ne working capial is higher (Uysalvahap, 1). Seffen Rapp (1) in his sudy described a dual relaionship beween free cash flow and remained cash as following: firsly, here is a posiive physical relaionship beween hem. The free cash flow leads o higher remained cash flow because i akes a long ime o be invesed free cash flow by company. Secondly, in erms of predicing, he companies which creae higher free cash flow require o hold less cash because invesmens and paymens are proceeded by cash arising from normal operaion. Alhough he second effec reduces o he exen he firs effec bu he physical relaionship ends o dominae more. So wih all oher consan facors, he company mainains more cash wih higher free cash flow (Marc, 1). Research hypohesis 1) Deviaion from expeced cash reduces fuure. ) Impac of negaive deviaion from expeced cash on fuure is more han impac of posiive deviaion. Mehod of sudy Mehod of his sudy is a ype of correlaion ha use of regression analysis o achieve model coefficiens. Time zone of sudy Period of reviewing his research is from 3 o 11. Based on saisical mehods and saisical sociey condiions, 84 companies are seleced as a sample for 9 years. Variables in research model Model (1) CASH b IndCASH 8 a b FCF b NEF b SIZE 1 b 9 LagCASH 3 b 4 BM b RD b WC 6 b 7 NLEV Model () DEVAT, 1 1 i Model (3) Is an explanaory model and saes ha deviaion variables from he indusry average and posiive deviaion from and negaive deviaion is added and is developed is model. 1 DEVAT 1 DFM SPDFM 3 SNDFM 4 Model (4) 1 PDEVAT r 1 DFM SPDFM 3 SNDFM 4 Model () 1 NDEVAT r 1 DFM SPDFM 3 SNDFM 4 169

4 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 Dependen variable In his sudy he dependen variable of fuure rae of company s asses ha is calculaed as following: 1 Ne Income Toal Asses 1 1 CASH= is company s cash achieved by balance shee of company FCF= is free cash flow ha is calculaed as following. FCF= (change in working capial- capial expendiure- depreciaion + profi) NEF= is ne exernal financing ha is as a capial increase and increase in long-erm debs and increase in shor-erm debs NEF= (Increase of long-erm deb+ increase of shor-erm deb+ increase of capial) SIZE= he size of company and o calculae i use of sales logarihm. BM=raio of book value o is marke value and is calculaed as follow: Book Value BM MarkeValue RD=research coss and developmen of company achieved by noes of financial saemens devised ino oal asses of company. WC=ne working cash and o calculae cash and shor-erm invesmen is removed and calculaed as follow: WC Curren Asses Cash Toal liabiliy shor erm Deb Tax Payable NLEV=ne financial average and is calculaed as follow: NLEV Sho Term Deb Long Term Deb Toal Asses LagCASH=variable delay of cash held in company, achieved by balance shee. IndCASH=he cash held average in indusry.o achieve cash held average,firsly he amoun of cash held achieved by balance shee hen heir oal amoun is divided ino oal number of indusrial companies. =company asses and is calculaed as follow: Income Toal Asses DEVAT=absolue value of cash held in company, o calculae i use componen of error in model 1 as deviaion of expeced cash. Componen of error in model 1 or remaining of model 1 show ha how much cash of his year is no saed by company variables and in fac show ha how much cash is unexpeced and is away from cash. Solan and Trowal (8) used his mehod o calculae unexpeced cash (deviaion of expeced cash).posiive remaining amoun show he posiive deviaion of expeced cash and negaive amoun show negaive deviaion of expeced cash and zero amoun doesn' show any deviaion (Solan and Trowal, 8). DFM=difference in company asses wih asses indusry average o achieve i's needed o calculae of indusry asses and calculae i's average and finally deduc company asses from indusry asses. 163

5 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 Indusry Then DFM n i 1 i, n IndusryRO A SPDFM= variable square of DFM when deviaion is posiive. SPDFM DFM IFDFM SNDFM=variable square of DFM when deviaion is negaive. SNDFM DFM IFDFM PDEVAT=deviaion is posiive. PDEVAT DEVAT IF DEVAT NDEVAT=deviaion is negaive. NDEVAT DEVAT IF DEVAT Descripive saisics In his secion, calculaed variable informaion relaed o each of he period under review is presened. These variables include dependen and independen variables. descripion Cash held Fuure asses Table 1.descripive saisics of dependen variables of research average middle Crierion maximum deviaion minimum Table.descripive saisics of some independen of research descripion average middle Crierion maximum deviaion Deviaion of expeced cash Deviaion of indusry average Posiive cash deviaion Negaive cash deviaion absolue value of cash deviaion minimum Inferenial saisics In his research as menioned in previous pages, hypohesis esing is conduced by panel mehod. A firs, panel mehod is presened and hypohesis esing is performed according o his mehod. To es firs hypohesis, i s needed o calculae deviaion of expeced cash and is absolue value. To do model 1 is fied and remaining componens are used as deviaion of expeced cash for nex models. variable C FCF NEF NLEV RD SIZE WC LNCASH LAGCASH BM coefficien Table3. Fiing of model 1 T amoun Significance level

6 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 F Tes Table4. Saisical absrac of model Deerminaion of coefficien Wason camera 1.97 Afer fiing model 1, all achieved errors of his model is applied for model and is absolue value is calculaed and is applied as independen variable of oher models. The firs hypohesis es Deviaion of expeced cash reduces fuure. Type of es Chaw es Houseman es Table. Chaw and Houseman Tes o review panel mehod and is effecs Saisic of es Value of saisic es Degree of freedom P-Value (83,) F Noe ha F calculaed of Chaw (1.91) of F is greaer crisis, so H hypohesis is rejeced and wih 9% of confidence can use Panel daa mehod. Noed ha is specified, panel mehod should be applied; anoher esing should be performed o apply he fixed effecs mehod or chose he random effecs. Also, according o he resuls of Houseman es, calculaed (138.7) is larger han crisis in 9% of confidence level. So H hypohesis is rejeced and i's needed o apply he fixed effecs mehod for esimaion. Also he above model is esimaed by using of Panel daa mehod and as a one-way fixed effec. Table6. Fiing of model by using of Panel fixed effecs mehod Variable coefficien T amoun significance level Inercep Asses Absolue value deviaion of he expeced cash F es Coefficien deerminaion Table 7.absrac resuls of he saisical model Wason camera Pagan cu Coded Anderson Darling.63 Table 7 (summary of saisical model) shows ha according o amoun of F es, model is significan and zero hypohesis based on being zero of coefficiens is rejeced. So F Tesing show ha, he coefficiens are differen from zero significanly and he model is significan.coefficien deerminaion according o Panel fixed effecs mehod show ha 86% of changes in dependan variable are saed by independen variables. INTERPRETATION OF RESULTS Fiing of model in above able show, here is an inverse relaionship beween deviaion of cash and fuure. I means ha wih increasing deviaion and he size, fuure is reduced and whaever deviaion increase,he fuure is reduced.also deviaion coefficien of expeced cash is significan saisically,so i can be saed ha he firs research hypohesis is confirmed. Also raio of curren asses is significan and posiive saisically ha show he curren year saes 7% of changes in fuure year. The second hypohesis es Effec of negaive cash of expeced cash on fuure is more han effec of posiive deviaion. To es second hypohesis, model 4 and should be fied and achieve posiive coefficien deviaion of cash and negaive coefficien deviaion of cash. Noed ha hypohesis sae; negaive deviaion of cash have a greaer impac compared wih he posiive deviaion. So i is expeced in case of being significance of coefficiens, negaive deviaion coefficien of cash is greaer han posiive coefficien deviaion of cash. Model 4 Tes Type of Tes Chaw Tes Table 8.Chaw Tes o review of Panel mehod Tes saisic Amoun of es Degree of freedom saisic (83,169) F P- Value

7 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 Noed ha calculaed F OF Chaw es (1.) of F is no a larger crisis, so H hypohesis is no rejeced and wih 9% of confidence we can use a combined daa mehod. Variable Asses Efficiency deviaion of he indusry average Power of posiive deviaion of asses Power of negaive deviaion of asses Posiive deviaion of cash Table 9.model 4 fiing wih combined mehod Coefficien T amoun Significance level F es Coefficien deviaion.4864 Table 1.absrac of saisical resuls Wason camera Pagan cu Coded Anderson Darling 33. Table 11.review of muli lineariy by using of sample variance inflaion index Variable Coefficiens variance Variance inflaion index Inercep.149 NA Asses Efficiency deviaion of he indusry average Power of posiive deviaion of asses Power of negaive deviaion of asses Posiive deviaion of cash Table 1 (summary of saisical ess) shows ha F es amoun is significan and zero hypohesis is rejeced based on being zero of coefficiens. According o F es we conclude he coefficiens are differen from zero, significanly and he model is significan. Deerminaion coefficien based on combined mehod show ha 48% of changes in dependen variable are saed by independen variables. INTERPRETATION OF RESULTS Fiing of model 4 in above ables show ha, deviaion coefficien of posiive cash has a posiive impac on fuure ; i means ha whaever he cash deviaion is greaer, fuure increase. This coefficien is significan saisically. Model es Table1. Chaw and Houseman es o review of using Panel mehod and is effecs Type of es Tes saic Amoun of es Degree of freedom p- Value saisic Chaw es F (83,41). Houseman es Noed ha calculaed f of Chaw es (176) of F is a greaer crisis, so H hypohesis is rejeced and wih 9% of confidence we can use of Panel daa mehod. When i is specified o use Panel mehod, anoher es should be performed o apply fixed effecs mehod or random effecs. Also based on resuls of Houseman es, calculaed (67.17) is larger han crisis in 9% of confidence level. So he H hypohesis is rejeced and i is needed o use of fixed effecs mehod for esimaion. Also he above model is esimaed by using of Panel daa mehod and one-way fixed effecs. Table13. Fiing of model by using of Panel fixed effecs mehod variable Coefficien T amoun Significance level inercep Asses Efficiency deviaion of he indusry average Power of posiive deviaion from asses Power of negaive deviaion from asses Negaive deviaion of cash

8 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (11), , 13 F es Deerminaion coefficien 7741 Table 14.summary of saisical resuls Wason camera Pagan cu coded Anderson Darling.317 Table 14 (absrac of saisical ess) shows ha in F es amoun, he model is significan and he zero hypohesis based on being zero of coefficiens is rejeced. So we conclude of F es ha coefficiens are differen from zero significanly and he model is significan. Deerminaion coefficiens according o Panel mehod show ha 7% of changes in dependen variable are saed by independen variables. INTERPRETATION OF RESULTS The negaive deviaion coefficien of cash is posiive. As, deviaion number of negaive cash are negaive and coefficien is posiive, so whaever he negaive number of negaive cash deviaion increase, increase and will be greaer. In fac, whaever deviaion is smaller and goes o negaive, reduce. Noed ha, coefficien is significan saisically, so we can by comparing he raio of negaive deviaion (.79) wih posiive deviaion (.36371) found ha he negaive deviaion coefficien is larger and effec of negaive deviaion on fuure is more han effec of posiive deviaion on fuure. I means ha negaive deviaion has a greaer impac, so he second hypohesis is confirmed. RESEARCH RESULTS Hypohesis Firs hypohesis Second hypohesis Table 1.summary of research resuls descripion Deviaion of expeced cash reduce fuure Effec of negaive deviaion of expeced cash on fuure is more han effec of posiive deviaion FIRST HYPOTHESIS RESULTS Confirmed or rejeced Confirmed Confirmed The firs hypohesis saes ha deviaion of expeced cash on fuure of asses is effecive and reduce i.in fac, o confirm his hypohesis we conclude he cash is one of he facor effecing on profiabiliy of companies and in case of shorage, he companies are obliged for financial supplemen ha impose oo much financial coss for companies and leads o reduce profiabiliy. So we conclude ha companies need cash held for profiabiliy because he rae of financial supplemen in Iran is more han he rae of mainenance opporuniy cos of cash. So in case of no keeping companies' cash wih higher rae of cos opporuniy are obliged for financial supplemen cause consequences such as reducing profiabiliy and financial consrains of companies. Moreover, he deb raio increases wih financial supplemen and credi and financial risk of company increase. The resuls of his research are consisen wih Koeen and Li resuls (Koeen and L 9). SECOND HYPOTHESIS RESULTS The second hypohesis saes ha negaive deviaion compared wih he posiive deviaion has a greaer impac on fuure and based on achieved resuls; posiive deviaion increase fuure and negaive deviaion reduce fuure. So we conclude ha whaever he company's cash is greaer, he financing is reduced and can inves plans and achieve more profi. On he oher hand, negaive deviaion reduces fuure. This issue saes ha companies in reurn for he cash shorage spend oo much money ha reduces profiabiliy. Bu an ineresing resul is he effec of negaive deviaion is more han posiive deviaion and show ha uiliy of posiive deviaion is less han uiliy of negaive deviaion or in oher words, he impac of 1 IRR cash shorage is more han 1 IRR added cash. So we conclude ha companies are required To specify he required level of heir cash o avoid cash shorage. The resuls of Li and Koeen research (9) recommended o invesors and users according o he resuls of his research wih achieved resuls and also he inverse relaionship beween cash and fuure o pay aenion he company cash and possible deviaions. Also i is recommended o financial and execuive managers of organizaions and companies o mainain heir cash in a desirable level o avoid profiabiliy shorage. Since posiive deviaion has a less impac compared wih he negaive deviaion on fuure and he effec of posiive deviaion on is posiive ha increase profiabiliy.i is recommended o execuive managers o receive heir demands and ry o keep up he cash in order o increase heir profiabiliy and in case of negaive deviaion ry o minimize hese deviaion. 1634

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