European Journal of Economic and Financial Research
ISSN: 2501-9430
ISSN-L: 2501-9430
Available on-line at: http://www.oapub.org/soc
10.5281/zenodo.56835
Volume 1│Issue 1│2016
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY
OF CASH BALANCE AND ABNORMAL RETURN AS WELL AS
COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF
FOOD INDUSTRIES ADOPTED IN TEHRAN STOCK EXCHANGE
Zhila Mohammadvand1, Najaf Karami2
Department of Public Administration, Mahabad Branch,
1
Islamic Azad University, Mahabad, Iran
Lecturer of Payam Noor University, Department of Accounting, Miandoab, Iran
2
Abstract:
Unexpected changes of abnormal return having to do with companies are the concept
that has been considered several times by market activists and investors. In so doing,
the market changes are taken into account as the important events in the field of science
and practice. In general, fear of crisis is deemed as permanent source of stress and
anxiety. The aim of the present study is to determine the relationship between cash
balance changeability and abnormal return as well as commercial credit of active
companies in the field of food industry in Tehran stocks center. The statistical sample
comprises of 27 active companies and the study lasts for 7 years i.e. 2006 to 2010.
Research hypotheses were studied using correlation method and making use of
multivariate regression models. The findings indicated that there was a significant
relationship between the liquidity level fluctuations due to economic shocks and
abnormal return of companies. In other words, when it comes to the changes in
economic shocks, the increase of changes in cash balance would lead to increase in
capital market response and would result in more return of companies compared to
capital market return. Also, liquidity did not have a determining role in commercial
credit of companies.
Keywords: changeability of cash balance, abnormal return, commercial credit
Correspondent author: Najaf Karami, email: najaf.karami@yahoo.com
Copyright © The Author(s). All Rights Reserved
Published by Open Access Publishing Group ©2015.
26
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
Introduction
Market economic shocks are considered as one of the interesting events in the field of
science and proactive. Generally, investors and managers of companies consider the
fear of crisis as permanent source of stress and anxiety (Almedia et al., 2012).
Unexpected changes of abnormal returns relevant to companies are the concept that has
been considered repeatedly by market activists and investors. In general, two-digit
negative index return in a couple of days and in short time duration as well as liquidity
increase without any support are taken into account as the economic shock for
companies, simply, economic shock is defined as a sudden decline in stocks index in a
short time (Dochin et al. 2010). Several studies conducted in the field of liquidity have
drawn their attention to experimental theories and their studies have shown the
possible bond between companies' liquidity size and real fluctuations of economy
(Flanrey & Lokhart, 2009).
Considering the development and depth of market in every financial market, it is
claimed that there are a variety of instruments to invest. One of the fundamental issues
in investment is considering the credit ranking of companies since it is feasible that a
number of investors require the access to their financial resource. That is the fact they
look for investing in companies whose liquidity size is high and one of the ways to
identify higher levels of liquidity is considering their commercial ranking. The rate of
fluctuations has to do with welcoming the transaction in stock exchange by investors.
Investors are well aware that in case they tend to sell their capitals, they should have in
mind whether there is an appropriate market for them or not. The issue is regarded as
the risk appearance of liquidity size for the assumed company in the mind of buyer
which can lead to the ignorance of investor (Almedia et al., 2012). Studying the effect of
fluctuations pertinent o liquidity level derived from economic shocks on abnormal
return and commercial credit of companies would be the fundamental solution in
relation to answering the questions.
The focus of the current study is to investigate the effect of fluctuations having o
do with liquidity level due to economic shocks on abnormal return and commercial
credit of companies in adopted companies in Tehran stock exchange. So, the main
research questions is if the proposed fluctuations of liquidity level derived from
economic shocks have any effect on abnormal return and commercial credit of
companies.
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
27
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
Research hypotheses
Hypothesis 1: There is a significant relationship between changeability of cash balance
due to economic shocks and abnormal return of companies.
Hypothesis 2: There is a significant relationship between changeability of cash balance
due to economic shocks and commercial credit of companies.
Related studies
Young and Kim (2009) investigated the relationship between abnormal return and the
styles of financial support, company size and cash pays. The results indicated that only
cash pay was correlated with abnormal return.
Emaima et al. (2009) studied the value and credit of obliged and voluntarily
unleash in capital market and concluded that obliged unleashing had a negative
relationship with institutions value after controlling the variables such as company's
beneficiary and size. Also, they showed that voluntarily unleashing was not significant
in relation to institutions' value.
Cameron Trong (2011) drew the attention on investigating the relationship
between abnormal return and income of share with using company's criteria, expenses
of transactions and P/E ratio. The results manifested that these criteria had an impact on
companies’ performance.
Zarei (2010) surveyed the liquidity effects on bubble behavior of housing
expenses in civil districts of Iran for the years 1992-2007. The results showed that
liquidity had a considerable effect in this duration. Such an effect was reported higher
than the common Era.
Jabarzade et al., (2010) identified the affective factors on abnormal return of share
in the initial distribution. The results manifested that the predicting error of each share,
market common circumstances prior to distribution, the ratio of owing to shareholders,
the ratio of pure interest and return of shareholders were in direct relationship with
predicting variables of each share in a positive form and the reverse relationship was
reported with the ratio of pure interest to abnormal return in 12 month duration. None
of the variables was correlated with abnormal return.
Sajadi and Zarezade (2011) investigated the relationship between managers'
encouragement and motivation plans and criteria for performance evaluation in
adopted companies of stock exchange. They concluded that there was a relationship
between paid wage to managers and economic-based criteria. Also, the findings
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
28
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
revealed that there was a significant relationship between the percent of managers'
shareholding and market added value and that there was no significant relationship
with other economic criteria.
Research variables and the quality of calculation
Research dependent variables
The method of evaluation has been taken from the one proposed by Apendini and
Gariga (2014). The applied methods have ben rooted in theoretical and experimental
evidences which have been employed in line with testing the research hypotheses by
the researcher.
Abnormal return )
ARi ,t
(: the expected return of share equals to the difference
between company return rate and market return. In order to determine the expected
return of share , balanced model of market is used.
ARit Rit Rmt
Commercial credit (
APi ,t
(1)
): in order to calculate the commercial credit of companies
based on the study of Garcia and Montriol (2014), the study has made use of the ratio of
receivable accounts to company sale.
�� =
Re ei
le
�� � � �
�
(2)
Research independent variables
The independent variable is the fluctuations of liquidity level derived from economic
shocks where Ribelo (2005) report is used so as to calculate it:
CRISIS * LIQi ,t I t Yt Nt Kt Dt / N
CRISIS * LIQi ,t R * LIQ
(3)
CRISIS: reflects the economic shocks and to obtain it requires the use of internal GDP
growth. So, the eras which have experienced negative GDP are taken into account as
economic shock and the CRISSI variable would be equal to 1.
LIQi ,t = equals to company liquidity and the calculation is as follows:
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
29
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
LIQi ,t
Cash-based assets
=
Book value of all assets
Statistical population
The research has made use of stratified financial data and audited cases of active
companies in the field of food industries in Tehran stock exchange. Considering the
research variable, one is able to define the following criteria in excluding sampling,
The financial period would lead to 29th of February in terms of the increase of
comparability
There would be no fiscal year during the years of investigation (2006-2010). The
required data are available in definition section.
Table 1: The quality of choosing and extracting the sample
The number of active companies in food industries to have participated in stock
exchange during 2006-2010
35
The number of companies whose financial fiasco leads to late February
31
The number of companies which have not experienced change in financial fiasco
31
Active company transaction symbol and more than 4 months per year, no stop of
transaction symbol
The number of companies whose data have been collected
27
27
The quality of hypotheses testing
In order to test the research hypotheses, the provided regression models is used i.e.
Amepndini and Gariga (2014). These models have been taken from the study conducted
by Tang and Wee (2008). In these regression models, abnormal return and commercial
credit are considered as the dependent variables and as a function of independent and
control variables, the aforesaid models are as follows:
First hypothesis testing model
ARi ,t 0 1CRISIS * LIQi ,t 2 M / Bi ,t 3 Sizei ,t 4 NWCi ,t 5CFi ,t 6CPAX i ,t
7 DEBTi ,t 8CF _ Volatility i ,t 9 DIV _ Dummyi ,t εi,t
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
30
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
Second hypothesis testing model
APi ,t 0 1CRISIS * LIQi ,t 2 M / Bi ,t 3 Sizei ,t 4 NWCi ,t 5CFi ,t 6CPAX i ,t
7 DEBTi ,t 8CF _ Volatility i ,t 9 DIV _ Dummyi ,t εi,t
Results
The results of the first hypothesis testing
Hypothesis 1: there is a significant relationship between changeability of cash balance
due to economic shocks and abnormal return of companies
To test the hypothesis, regression model is used in which abnormal stock returns is
considered as the dependent variable and as a function of independent and control
variables. The results from analysing the regression model having to do with the first
hypothesis are given in table 2.
Table 2: The results of statistical analysis for the first hypothesis
Balanced R2
0.225
Variable
Watson statistic camera
F statistic
2.088
F level of significance
13.303
Β coefficient value standardized
0.000
T statistic
Level of significance
CRISIS*LIQ
0.002
2.055
0.026
MB
0.113
3.198
0.001
Size
-0.006
-0.154
0.877
NWC
0.051
2.06
0.018
CF
0.014
0.393
0.695
CPAX
0.027
0.672
0.446
DEBT
-0.058
-2.226
0.02
Cf_Vol
0.027
0.768
0.443
0.08
2.214
0.027
DIV
The statistical analysis results having to do with the credit of regression model is
provided in the first section of the above table. The determining coefficient of regression
model is 0.255. This means that this model is able to predict 22.5% of the changes
relevant to abnormal stock rerun of companies in statistical sample through
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
31
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
independent variables. Also, the results show that Watson statistic camera falls between
1.5 and 2.5, so there is no strong correlation between the regression sample errors. In
addition, no self-correlation is found between the errors as one of the fundamental
hypotheses of regression in relation to the studied model.
The results of regression variance analysis (ANOVA) which his decided based on
the F statistic, is provided in the two last columns of table 2 for the studied model in the
first secondary hypothesis testing. The statistical hypotheses relevant to the statistical
analysis are as follows:
H0: βi=
regression sample is not significant
H : βi≠
regression sample is not significant
The level of significance for F statistic for the model is less than the level of error for the
test, so null hypothesis is rejected and the estimated regression is statistically significant
and the relationship between the research variables is that of linear. The estimated
coefficient for CRISIS*LIQ variable which shows the relationship between the
fluctuations of liquidity level derived from economic shocks and abnormal return of
companies is 0.002 and that of 0.06 level of significance. This finding shows a direct and
significant relationship between the mentioned variables, in other words, the increase of
companies' liquidity level in economic shock period leads to the increase in their
abnormal return. The results having to do with the control variables indicate that there
is a direct and strong relationship between the ratio of market value to book value, pure
asset in balance and divided share by abnormal return of share. There is a reverse
relationship between the abnormal return and financial leverage. In other words,
companies categorized by higher levels of owing have experienced lower levels of
return. Also, cash flow, capital expenses and fluctuations of cash flow were not
correlated with abnormal return. These findings indicate that the aforesaid variables are
not taken into account as the affective factors on response of asset market and they
emphasize that the asset market activists are suggested not to consider them in their
short-term decision-making process.
Generally, the results indicated that there was a significant and reverse
relationship between the level of liquidity derived from economic shocks and abnormal
return. These findings are in correspondence with the claim proposed in the first
hypothesis which is accepted in 95% level of confidence.
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
32
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
Results for the second hypothesis testing
Hypothesis 2: there is a significant relationship between changeability of cash balance
due to economic shocks and commercial credit of companies
To test the hypothesis, regression model is used in which commercial credit of
companies is considered as the dependent variable and as a function of independent
and control variables. The results from analyzing the regression model having to do
with the first hypothesis are given in table 3.
Table 3: The results of statistical analysis for the second hypothesis
Balanced R2
Watson statistic camera
0.154
Variable
F statistic
1.774
F level of significance
10.07
Β coefficient value standardized
0.000
T statistic
Level of significance
CRISIS*LIQ
0.005
0.149
0.882
MB
0.037
2.062
0.029
Size
0.12
3.269
0.001
0.139
2.947
0.003
-0.016
-0.46
0.646
CPAX
0.045
1.303
0.193
DEBT
0.277
5.902
0.000
Cf_Vol
0.026
0.76
0.448
DIV
0.014
0.391
0.696
NWC
CF
The estimated coefficient for CRISIS*LIQ variable which shows the relationship
between the fluctuations of liquidity level derived from economic shocks and
commercial credit of companies is 0.005 and that of 0.882 level of significance. This
finding shows that there is no significant relationship between the variables.
The results of the control variables indicate that there is a direct and strong
relationship between the ratio of market value to book value, company size, pure asset
in cash flow and financial leverage with companies commercial credit. In other words,
companies categorized by larger size and higher levels of owing enjoy higher levels of
commercial credit.
Also, there is no relationship between the commercial credit and cash flow
variables, capital-based expenses, cash flow fluctuations and divided share. These
findings manifest that the aforesaid variables have not determined the level of
commercial credit for companies and one is not able to rely on them when it comes to
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
33
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
evaluating company’s commercial credit. Generally, the results implied that there was
no statistically significant relationship between the fluctuations of liquidity level
derived from economic shocks and commercial credit return of companies. This finding
does not support the claim proposed in second hypothesis and it is rejected in 95% level
of confidence.
Discussion
Findings of the first hypothesis testing showed that there was a direct and strong
relationship between the fluctuations of the liquidity level derived from the economic
shocks and abnormal return. Based on the theoretical and experimental evidences, one
can consider the following inferences about the findings of the first hypothesis. First, it
is probable that the cash savings of studied companies were highly affected by the
changes compared to other periods. These findings indicate that the mentioned
companies were under the impact of major variables of economy and changes in major
economic variables led to change in their resource management solutions. Second, it is
probable that shareholders and capital market activists draw their attention to the cash
savings f adopted companies in stock exchange during the economic shock period. This
is feasible to be formed by perceiving the capital market on the part of the activists in
relation to management solutions of companies' cash savings. They might deem cash
savings changes as the optimum symptom of financial flexibility in companies.
Findings of the second hypothesis testing manifested that there was no
significant relationship between the fluctuations of liquidity level derived from
economic shock and companies' commercial credit. Theoretical principles clear out that
in case companies enjoy consistent cash savings, it is more probable that they have
more credit selling. However, findings of the present study indicated that the abovementioned theoretical principles have not been true for the studied companies. One can
attain two general inferences. First, it is probable that the fluctuations of cash flow of
studied companies are not to the extent that might have impact on management
solutions. In other words, the severity of companies' liquidity has been non-significant
during the study period.
Second, it is feasible that the studied companies' managers have not considered
the cash balance and its fluctuations when determining the solutions. That is to say that
cash fluctuations might not be taken into account as a determining factor of commercial
credit from managers' perspective.
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
34
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
Suggestions
Based on the obtained results, the study considers following as the efficient suggestions.
Applicable suggestions
Based on the first hypothesis result that there is a direct and strong relationship
between the fluctuations of liquidity level derived from economic shocks and abnormal
return of companies, it is suggested for managers that they consider potentials and
investing opportunities as the main factor to determine the retain of cash and they take
into account the macroeconomic variables and avoid any focus on cash flows.
Based on the results obtained from testing the second hypothesis saying that
there was no relationship between fluctuations of liquidity level derived from economic
shocks and commercial credit of companies, the present study recommends that
managers draw their attention to company cash savings and its consistency when
determining the financial solutions and make their efforts to adjust such solutions in a
way that the probability of experiencing financial limitations reduces.
Suggestions or further researches
-
Investigating the relationship between cash balance fluctuations and companies
investing opportunities;
-
Investigating the relationship between cash flow and investment efficiency of
companies considering the financial limitations;
-
Investigating the relationship between financial leverage and commercial credit
of companies in different commercial cycles.
References
1.
Almeida, H., Campello, M., Laranjeira, B., Weisbenner, S., (2012). Corporate debt
maturity and the real effects of the 2007 credit crisis. Critical Finance Review 1
(1), 3–58.
2.
Cameron,Truong.
index volatility,
. Employing high-low price range in forecasting market
Journal of International Financial Markets, Institutions &
Money. Vol. 21, Iss. 5; p. 637.
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
35
Zhila Mohammadvand, Najaf Karami –
DETERMINING THE RELATIONSHIP BETWEEN CHANGEABILITY OF CASH BALANCE AND ABNORMAL
RETURN AS WELL AS COMMERCIAL CREDIT OF ACTIVE COMPANIES IN THE FIELD OF FOOD INDUSTRIES
ADOPTED IN TEHRAN STOCK EXCHANGE
3.
Duchin, R., Ozbas, O., Sensoy, B.A., (2010). Costly external finance, corporate
investment, and the subprime mortgage crisis. Journal of Financial Economics 97,
418–435.
4.
Flannery, M.J., Lockhart, G.B., (2009). Credit lines and the substitutability of cash
and debt. Unpublished manuscript. Available at Social Science Research
Network: /http://ssrn.com/abstract=1422867S.
5.
Jabarzadem Kanagarlooii et al. (2010). Identifying the affective factors on
abnormal return off share in initial distribution of adopted companies in stock
exchange. Journal of Financial Accounting, 5.
6.
Sajadi, Hosein and Mohamad Sadeg Zarezade Mehrizi (2011). On the correlation
between managers encouraging wards and criteria of performance evaluation in
adopted companies of Tehran stock exchange. Journal of Financial Accounting,
3(4), 41-54.
7.
Tong, H., Wei, S.-J., (2008). Real effects of the subprime mortgage crisis: is it a
demand or a finance shock? Unpublished working paper no. 14205. National
Bureau of Economic Research, Cambridge, MA.
8.
Yang J, Hailin Qu and Kim W.
9 . Merger abnormal returns and payment
methods of hospitality firms, Journal of Hospitality Management, Vol.28, pp.
579-285.
9.
Zarei, Javad (2010). Investigating the effect of liquidity on housing cost bubble
across Iran. MA thesis, Islamic Azad University of Firozkoh.
Creative Commons licensing terms
Authors will retain copyright to their published articles agreeing that a Creative Commons Attribution 4.0 International License (CC BY 4.0) terms will
be applied to their work. Under the terms of this license, no permission is required from the author(s) or publisher for members of the community to
copy, distribute, transmit or adapt the article content, providing a proper, prominent and unambiguous attribution to the authors in a manner that
makes clear that the materials are being reused under permission of a Creative Commons License. Views, opinions and conclusions expressed in this
research article are views, opinions and conclusions of the author(s).Open Access Publishing Group and European Journal of Economic and Financial
Research shall not be responsible or answerable for any loss, damage or liability caused in relation to/arising out of conflict of interests, copyright
violations and inappropriate or inaccurate use of any kind content related or integrated on the research work. All the published works are meeting the
Open Access Publishing requirements and can be freely accessed, shared, modified, distributed and used in educational, commercial and noncommercial purposes under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
36