Financial performance and cash flow: Evidence from the US banking industry

Authors

DOI:

https://doi.org/10.18559/ref.2024.1.1042

Keywords:

financial performance, cash flow, leverage, liquidity, banks, efficiency

Abstract

This study examines the relationship between cash flow and financial performance with a sample of 122 American banks covering the period 2019-2022. Panel data analysis is applied. Financial performance is computed as the Return on Assets (ROA) and Return on Equity (ROE). The explanatory variables used are the net cash flow, free cash flow, cash flow from operating activities, cash flow from investing activities, cash flow from financing activities, size of banks, the leverage ratio, i.e., total liabilities to total assets, the liquidity ratio, i.e., current assets to current liabilities, and the efficiency ratio, i.e., total revenue to total assets. The results provide evidence of a negative relationship between financial performance and net cash flow. This is also the case for cash flow from investment and financing activities. On the contrary, the relationship of free cash flow with performance is positive. On the other explanatory variables, leverage and efficiency are positively related to financial performance.      

Downloads

Download data is not yet available.

References

Abughniem, M.S., Al Aishat, M.A.H., & Hamdan, A. (2020). Free cash flow and firm per- formance: Empirical evidence from the Amman Stock Exchange. International Journal of Innovation, Creativity, and Change, 10(12), 668–681.
View in Google Scholar

Alslehat, N., & Al-Nimer, M. (2017). Empirical study of the relationship between cash flow management and financial performance of Jordanian insurance companies. International Business Management, 11(3), 776–782.
View in Google Scholar

Amah, O. K., Ekwe, M. C., & Uzoma, I. J. (2016). Relationship of cash flow ratios and fi- nancial performance. European Journal of Accounting. Auditing and Finance Research, 4(4), 89–97.
View in Google Scholar

Brush, T. H., Bromiley, P., & Hendrickx, M. (2000). The free cash flow hypothesis for sales growth and firm performance. Strategic Management Journal, 21(4), 455–472. https://doi.org/10.1002/(SICI)1097-0266(200004)21:4<455::AID-SMJ83>3.0.CO;2-P DOI: https://doi.org/10.1002/(SICI)1097-0266(200004)21:4<455::AID-SMJ83>3.0.CO;2-P
View in Google Scholar

Buchwald, E. (2023, April 28). Signature Bank failed because of ‘poor management,’ FDIC report finds. https://edition.cnn.com/2023/04/28/business/signature-bank-fdic-re-port/index.html
View in Google Scholar

Farris, M. T. II, & Hutchison, P. D. (2002). Cash-to-cash: The new supply chain management metric. International Journal of Physical Distribution and Logistics Management, 32(4), 288–298. https://doi.org/10.1108/09600030210430651 DOI: https://doi.org/10.1108/09600030210430651
View in Google Scholar

Frank, B. P., & James, O. K. (2014). Cashflow and corporate performance: A study of se- and beverages companies. European Journal of Accounting and Finance Research, 2(7), 77–87.
View in Google Scholar

Gheshlaghi, F. D. R., Ahmadzadeh, Y., & Faal, F. (2014). The cash flow statement’s component effect on management performance in firms enlisted in Tehran Stock Exchange. Journal of Management and Accounting Studies, 2(1), 53–60. https://doi.org/10.24200/jmas.vol2iss01pp53-60 DOI: https://doi.org/10.24200/jmas.vol2iss01pp53-60
View in Google Scholar

Gao, Z., Li, W., & O’Hanlon, J. (2019). The informativeness of U.S. Banks’ statements of cash flows. Journal of Accounting Literature, 43(1), 1–18. https://doi.org/10.1016/j.acclit.2019.03.001 DOI: https://doi.org/10.1016/j.acclit.2019.03.001
View in Google Scholar

Hau, L. L. (2017). Free cash flow and firm performance: Evidence from sectoral levels for Vietnamese listed firms. International Journal of Advanced Engineering, Management and Science, 3(4), 296–300. https://doi.org/10.24001/ijaems.3.4.2 DOI: https://doi.org/10.24001/ijaems.3.4.2
View in Google Scholar

Hetler, A. (2024, March 13). Silicon Valley Bank collapse explained: What you need to know. https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-collapse-explained-What-you-need-to-know
View in Google Scholar

Heydari, I., Mirzafar, M., & Javadghayedi, M. (2014). Investigating the relationship between free cash flow and firm performance: Evidence from Tehran Stock Exchange. Indian Journal of Scientific Research, 4(6), 269–279.
View in Google Scholar

Jensen, M. C., (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
View in Google Scholar

Joshi, P. (2019). Relationship between free cash flow and firm performance: Evidence from Indian Stock Market. Think India Journal, 22(10), 3334–3340.
View in Google Scholar

Kadioglu, E., Kilic, S., & Yilmaz, E. A. (2017). Testing the relationship between free cash flow and company performance in Borsa Istanbul. International Business Research, 10(5), 148–158. https://doi.org/10.5539/ibr.v10n5p148 DOI: https://doi.org/10.5539/ibr.v10n5p148
View in Google Scholar

Khan, M. N., Parksh, R., Shamim, M., & Ali, S. (2021). Does audit quality matter for firm performance? Empirical evidence from Pakistani public listed companies. Elementary Education Online, 20(5), 3953–3960.
View in Google Scholar

Kroes, J. R., & Manikas, A. S. (2014). Cash flow management and manufacturing firm fi- nancial performance: A longitudinal perspective. International Journal of Production Economics, 148, 37–50. https://doi.org/10.1016/j.ijpe.2013.11.008 DOI: https://doi.org/10.1016/j.ijpe.2013.11.008
View in Google Scholar

Largest U.S. Banks by Asset Size. (2023, January 16). https://www.mx.com/blog/biggest-banks-by-asset-size-united-states/
View in Google Scholar

Moula. (2021, September 13). Current Liabilities and What They Mean for Businesses. https://moula.com.au/finance/current-liabilities
View in Google Scholar

Mulford, C., & Comiskey, E. (2009). Cash flow reporting by financial companies: A look at the commercial banks. Working Paper, College of Management, Georgia Institute of Technology, Atlanta.
View in Google Scholar

Murhy, Ch. (2022, June 20). Liquidity Coverage Ratio (LCR): Definition and How To Calculate. https://www.investopedia.com/terms/l/liquidity-coverage-ratio.asp
View in Google Scholar

Ni, Y., Huang, P., Chiang, P., & Liao, Y. (2019). Cash flow statements and firm value: Evidence from Taiwan. Quarterly Review of Economics and Finance, 71, 280–290. https://doi.org/10.1016/j.qref.2018.09.004 DOI: https://doi.org/10.1016/j.qref.2018.09.004
View in Google Scholar

Nwanyanwu, L. A. (2015). Cashflow and organizational performance in Nigeria: Hospitality and print media industries perspectives. European Journal of Business, Economics and Accountancy, 3(3), 66–72.
View in Google Scholar

Rahman, A., & Sharma, R. B. (2020). Cash flows and financial performance in the industrial sector of Saudi Arabia: With special reference to insurance and manufacturing sectors. Investment Management and Financial Innovations, 17(4), 76–84. https://doi.org/10.21511/imfi.17(4).2020.07 DOI: https://doi.org/10.21511/imfi.17(4).2020.07
View in Google Scholar

Rasheed, I., & Shahzad, K. (2020). The impact of free cash flow on a firm’s performance: Evidence from textile sector of Pakistan. Asian Finance Research Journal, 2(1), 62–72. Saul, D. (2023, May 1). First Republic Bank Failure: A timeline of what led to the second-larg-est bank collapse in U.S. history. https://www.forbes.com/sites/dereksaul/2023/05/01/first-republic-bank-failure-a-timeline-of-what-led-to-the-second-largest-bank-collapse-in-us-history/?sh=6656886e67b7
View in Google Scholar

US Banks Total Assets (I:USBTA). (2023). https://ycharts.com/indicators/us_banks_to-tal_assets
View in Google Scholar

Wang, G. Y. (2010). The impacts of free cash flows and agency costs on firm performance. Journal of Service Science and Management, 3(4), 408–418. https://doi.org/10.4236/jssm.2010.34047 DOI: https://doi.org/10.4236/jssm.2010.34047
View in Google Scholar

What is a good liquidity ratio? (2023, 13 April). https://www.freshbooks.com/hub/ac-counting/good-liquidity-ratio
View in Google Scholar

Yameen, M., Farhan, N. H. S., & Tabash, M. (2019). The Impact of Liquidity on Firms’ Performance: Empirical Investigation from Indian Pharmaceutical Companies. Academic Journal of Interdisciplinary Studies, 8(3), 212–220. https://doi.org/10.36941/ajis-2019- 0019 DOI: https://doi.org/10.36941/ajis-2019-0019
View in Google Scholar

Zygmunt, J. (2013). Does liquidity impact on profitability? A case of Polish listed IT companies. In: Conference of Informatics and Management Sciences, Poland, March 25–29.
View in Google Scholar

Downloads

Published

2024-06-20

Issue

Section

Articles

How to Cite

Rompotis, G. G. (2024). Financial performance and cash flow: Evidence from the US banking industry. Research Papers in Economics and Finance, 8(1). https://doi.org/10.18559/ref.2024.1.1042

Similar Articles

1-10 of 41

You may also start an advanced similarity search for this article.