The Empirical Research On The Effect Of Cash Flow Volatility On Enterprise Value

Cash flow volatility is the power of level that net cash flow deviate from average. Unstable cash flow always come with operating risk, which contribute to the uncertainty of future, and damage the interests of shareholders. So some investors incorporate Cash flow volatility into the system of enterprise value evaluation and treat it as a sign of guiding investment. This article focus on researching the influence which company cash flow make, comparing it with effect of earning volatility, and analyzing the credibility of cash flow volatility as foundation of corporate valuation, exploring the path of impact.Previous research on the factors of corporate valuation focus on earning index, and prove the effect of profit stability on company value. But along with recognizing of the maneuverability of earning and the widespread of financial information controlling, the effect of this index is weakened. So more and more research turn to cash flow index which is hard to be controlled, and replace earning index with cash flow volatility when they measure operating risk. But there is no unified conclusion on whether cash flow volatility can raise or reduce enterprise value. This article makes an empirical study of the relationship between cash flow volatility and market value with panel data of listing corporations from2004-2013. We found that the effect of cash flow volatility on corporate value is negative, and violent volatility will reduce the price of a company.By contrasting the study of earning volatility with cash flow volatility’s, we get different conclusions, which is that the effect of earning volatility on corporate value is positive. It means that if earning volatility is more violent, value of the company will rise. This is the reflection of speculation behaviors and impulsion of investors. Last but not least, this article explores the trail which cash flow volatility conduct its effects on, and finds out that the cost of equity is Intermediate variable. Cash flow volatility can reduce value of a company by increasing its financing cost in secondary market.