Literature review of cash flow in finance

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Literature review of cash flow in finance

Why have economies polarized so sharply since the s, and especially since the crisis? How did we get so indebted without real wage and living standards rising, while cities, states, and entire nations are falling into default?

Only when we answer these questions can we formulate policies to extract ourselves from the current debt crises. But it was precisely this period from the mids to that saw the fastest and most corrosive inflation in real estate, stocks, and bonds since World War II.

Get Evonomics in your inbox Nearly all this asset-price inflation was debt-leveraged. Money and credit were not spent on tangible capital investment to produce goods and non-financial services, and did not raise wage levels.

Current cutting-edge macroeconomic models since the s do not include credit, debt, or a financial sector King ; Sbordone et al. In this article, we present the building blocks for an alternative. This will be based on our scholarly work over the last few years, standing on the shoulders of such giants as John Stuart Mill, Joseph Schumpeter, and Hyman Minsky.

This financial expansion took the form more of rent extraction than of profits on production Bezemer and Hudson — a fact missed in most analyses today for a proposal, see Kanbur and Stiglitz The credit crisis and recession are, therefore, a true paradigm test for economics Bezemera, b.

We can only hope to understand crisis and recession by developing models that incorporate credit, debt, and the financial sector Bezemer ; Bezemer and Hudson Here we provide the conceptual underpinning for this claim.

Banks mainly finance the purchase and transfer of property and financial assets already in place. Since the s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue.

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Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations. When the financial bubble bursts, negative equity spreads as asset prices fall below the mortgages, bonds, and bank loans attached to the property. We are still in the unwinding of the biggest bust yet.

Corporate managers, as well as money managers and funds, seek mainly to produce financial returns for themselves, their owners, and their creditors.

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The main objective is to generate capital gains by using earnings for stock buybacks and paying them out as dividends Hudson a, bwhile squeezing out higher profits by downsizing and outsourcing labor, and cutting back projects with long lead times.

Leveraged buyouts raise the break-even cost of doing business, leaving the economy debt-ridden. Profits are used to pay interest, not to reinvest in tangible new capital formation or hiring. In due course, the threat of bankruptcy is used to wipe out or renegotiate pension plans, and to shift losses onto consumers and labor.

This financial short-termism is not the kind of planning that a government would undertake if its aim were to make economies more competitive by lowering the price of production. It is not the way to achieve full employment, rising living standards, or an egalitarian middle-class society. The latter is associated primarily with the acquisition and transfer of real estate, financial securities, and other assets.

In the next section, we state our case, distinguishing the financial sector from the rest of the economy, and rent from other income. They must be analyzed as separate but interacting systems, with real estate assets and household mortgage debt at the center of the bubble economy.

In section three, therefore, we examine the significance of household debt.IntroductionOver the last decade numerous accounting papers investigate the empirical relation between stock market values (or changes in values) and particular accounting numbers for the purpose of assessing or providing a basis of assessing those numbers’ use .

The academic literature in financial economics has identified some conditions under which hedging can add value to a firm – for instance if credit constraints imply a need for sufficient funds to finance investments, tax payments that are increasing in cash flow volatility or ill-diversified owners.

3 where: DIV t is the dividend for the current period, DIV t-1 is the dividend for the previous period, Adj is the adjustment rate DIV t+1 is the target dividend ratio and EPS t is the earning per share for the current period.

Literature review of cash flow in finance

However, from a more recent literature, namely Kumar and Lee (), the authors claimed to. The empirical results show that past earnings, cash flows, cash flow and accrual component of earnings can be used to predict future cash flows of Thai listed companies and cash flows have better predictive power than past earnings.

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