The relation between cash flows and economic performance in the digital age: An empirical analysis

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Abstract

Cash flows analysis plays an increasingly important role in the study of business dynamics since cash flows play a key role in the company’s economic performance, not only from a standpoint but also in predictive terms. The literature on the subject is poor in number and depth of research, the samples analyzed so far are limited and the statistical tools are weak. Retracing the steps of past research, we studied the relationships between cash flows of several management areas and economic performance, using a complete sample of Italian listed companies in the 2008-2017 period with more solid statistical tools compared to previous studies. The database used to collect all the balance sheet data necessary to conduct our research is Amadeus of the Bureau Van Dijk platform, which already shows reclassified and easily comparable financial statements. Correlation and multiple regression analysis were used to assess if our cash flow proxies could be strong predictors of future cash flow and, consequently, of business performance. The flows for investments and the ability to generate cash, where the latter is positively correlated with future profitability, manage to explain, together with the net cash generation of the company, a large part of the variability of the operating income produced in subsequent periods. The flows from investments seem to be the most suitable for correctly classifying the most profitable companies in the medium-long term, while cash generation, deriving from the characteristic activity, contributes to providing answers, about corporate profitability, on shorter time horizons.

Keywords: Earnings, Cash Flows, Forecasting Future Cash Flow

Authors’ individual contribution: Conceptualization – S.F., A.T., R.F., and G.D.C.; Methodology – S.F., A.T., R.F., and G.D.C.; Formal Analysis – S.F., A.T., R.F., and G.D.C.; Investigation – S.F., A.T., R.F., and G.D.C.; Data Curation – S.F., A.T., R.F., and G.D.C.; Writing – Original Draft – S.F., A.T., R.F., and G.D.C.; Writing – Review & Editing – S.F., A.T., R.F., and G.D.C.; Visualization – S.F., A.T., R.F., and G.D.C.; Supervision – S.F., A.T., R.F., and G.D.C.; Project Administration – S.F., A.T., R.F., and G.D.C.; Funding Acquisition – S.F., A.T., R.F., and G.D.C.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M1

Received: 29.12.2019
Accepted: 24.03.2020
Published online: 26.03.2020

How to cite this paper: Ferri, S., Tron, A., Fiume, R., & Della Corte, G. (2020). The relation between cash flows and economic performance in the digital age: An empirical analysis. Corporate Ownership & Control, 17(3), 84-91. https://doi.org/10.22495/cocv17i3art6