Effect of Cash Flows on the Market Value of Jordanian Industrial Companies Stocks

The current study aims to assess the effect of cash flows of activities (operational, investment and financial) on market values in industrial companies stocks. The study adopted secondary sources for data collection from the annual reports of Jordanian industrial companies (52 companies) for the period 2007-2016. Furthermore, the study followed the descriptive analytical approach for data analysis in addition to utilizing the Gretle Stata model to test hypotheses. Results indicated a positive statistically significant effect for each of operational and investment activities on market value of industrial companies, while there was a negative relationship between financial activities and market value of industrial companies.


Introduction
The significance of financial statements differs based on accounting concepts and principles and at the time the balance sheet and income statement stand prominently among the financial statements regarding importance. This importance has declined because of management's provision of misleading information to cover any deficit in its performance and to facilitate its financial position for the targeted group. However, recently, there has been a great interest in cash flow and the company's ability to generate cash, so much so, the interest has shifted to cash flow statement. This statement is an analytical tool and an extension of the various financial tools and it explains the actual company cash inflows and outflows generated from the operational activities in addition to investment and financial activities. Added to this, the statement offers important indexes through which the financial performance of the company in general and profits quality in particular are evaluated and it also shows investment returns' size (Qaddoumi and Alkeelani, 2006).
A stock's market value is determined based on supply and demand strength through selling and purchasing orders and the market value is expressed by the stock price in the market, which is affected by several factors. These factors include companies' related factors in addition to political, economic, environmental and legislative factors, which are in turn, reflected on a stock's return and the extent of risk it faces (Mansour, 2001;Matar and Eneizan, 2018;Qaddoumi and Alkeelani, 2006).
This study aims to analyze the effect of cash flows with its all activities (operational, investment and financial) on market values among industrial companies listed in Amman Stock Exchange for the period 2007-2016. The results of this study offer financial information that can serve all concerned parties such as, management, shareholders, investors and researchers. In addition, the study offers researchers and specialists, in the field, the opportunity to conduct more in-depth research and studies. Furthermore, this study is among the rare studies that have examined the relationship between cash flows and companies' market value as majority of earlier studies in this field has focused on the Jordanian banking sector, and relied on net profit, assets' return and property right as indexes for evaluating financial performance, while ignoring the stock price as one of the most important performance indexes. Kharboush (2003), conducted a study to assess the relationship of cash flows with market value for Jordanian banks and financial institutions' stocks. The study included (16) institutions from the public financial institutions listed in Amman stock exchange during the period 1998-2001. The study used the Multiple Regression Analysis and results indicated no statistical significant relationship between the stock market value and the net cash flows. Siam and Khaddash (2003), investigated the importance of cash flows in analyzing the financial status and the financial achievements of the company. They also assessed cash flows based on market value. A unified model was developed to test the entire companies included in the study based on the analysis of model's results using simple and multiple regression analyses. The study included 23 industrial companies listed in Amman Stack Exchange in the year 2002, established prior to 1998 and traded shares for four years (1998)(1999)(2000)(2001). Among the most important results of the study was the existence of a statistically significant relationship between the stock market value and the net cash flow.

Literature Review
Moreover, Alkhalileh (2004) aimed to examine the relationship between profits-based performance indexes and cash indexes and the ability of each of them to explain the changes in stocks' returns. The study utilized (512) perceptions that represented the financial data for (32) companies listed in Amman Stock Exchange during the period 1984-1999. Results indicated a statistically significant and positive relationship between profits-based performance indexes and cash indexes.
In addition to the above studies, Alkhaddash and Ala'bbadi (2005) conducted a study to determine the importance of shareholders' rights return as a financial ratio based on merit and cash flows in evaluating the financial status and the market price of stocks in Jordanian public industrial companies. The sample included (26) companies listed in Amman Stock Exchange for the year 2002, which traded stocks for at least ten years. Results indicated that cash flows statement offers additional important information that support the information provided by other financial statements and there was a statistically significant relationship between the stock market values and the net cash flows.
Moreover, Altamimi and Alqaysi (2012) aimed to measure the relationship between free cash flows and the cost of capital and their impact on market value added. The results of Pearson correlation coefficients analysis found that there is a negative relationship between free cash flow with capital cost and positive with market value added, while the relationship between capital cost and market value added is negative. On the other hand, the results of the multiple regression analysis revealed the explanatory power of both the free cash flow and the cost of capital (the weighted average cost of capital) for the variance in the market value added. Thus, these results confirmed the theoretical framework between these three variables and the importance of using them as indicators when assessing the performance of companies.
In a related aimed to identify the relationship between the adequacy and efficiency of cash flows of operational activities. The study used the multiple regression analysis for hypotheses testing after checking validity of data. The study revealed a statistically significant and positive relationship for cash flows efficiency from operational activities and achieving profits in Amman and Palestine Stock Exchange. In addition, results indicated no relationship between cash flows adequacy related to operational activities.
Similarly, Akumu (2014) aimed to identify the effect of cash flows for companies listed in Nairobi Stock Exchange on their profitability. The study used the multiple regression analysis to identify the effect of cash flows on profitability of these companies during the period 2009-2013. The sample included 61 listed companies. Results indicated a negative effect of cash flows on companies' profitability and a main and negative effect on profits distribution ratio.
In Nigeria, Okpe et al. (2015) investigated the effect of cash flow on companies profitability for a sample comprising three banks for the period 2009-2013. The study used multiple regression and results indicated a positive effects for cash flows from operational and financial activities on the profitability of banks.
In the context of Pakistan, Kamran et al. (2017) aimed to examine the extent of cash flows effect on companies' profitability. Simple and multiple regression analyses were utilized for quantitative data analysis. It was indicated that cash flows enhance companies' performance but when cash flows exceeded the specific limits, this may create the problem of agency due to the interests' conflicts among owners and performance, which may in turn, lead to declined performance in companies. Results also indicated a positive correlation between cash flows and companies' profitability, with cash flows having a key role in enhancing companies' performance.
In Yook and Gangopadhyay (2010), the author conducted an assessment of cash flows on unusual returns using the ratios of cash flows' returns and the sectional regression analysis. Results indicated that companies with less than one coefficient and higher cash flows achieved more unusual returns compared to other companies.
Based on the above mentioned early studies, the current study is distinguished by focusing on the period from 2007-2016, making it the most current one among the studies reviewed above. In addition, this study focused on Jordanian industrial companies and considered three main activities for cash flows' statement (operational, investment and financial activities) and their effect on market value. Furthermore, this study focused on cash flows and their effect on the market value of companies' stocks.

Methodology
This study aims to analyze the effect of cash flows of Jordanian industrial companies' three main activities (operational, investment and financial activities) on the market value of companies stocks during the period 2007-2016. Hence, the main study hypothesis is formulated as follows; There is a statistically significant effect of cash flows from three main activities (operational, investment and financial activities) on stock market price among Jordanian industrial companies listed in Amman Stock Exchange.
From this main hypothesis, the following sub hypotheses were derived;  There is an effect of cash flows from operational activities on stock market value among industrial companies listed in Amman Stock Exchange.  There is an effect of cash flows from investment activities on stock market value among industrial companies listed in Amman Stock Exchange.  There is an effect of cash flows from financial activities on stock market value among industrial companies listed in Amman Stock Exchange. To achieve the goals of the study, all (64) industrial companies listed in Amman Stock Exchange for the period 2007-2016 according to the 2017 Statistics of Amman Stock Exchange and the Depository Center were considered. Twelve of these companies were excluded for several reasons, among which, the stopping of some companies of trading during the study period. In addition, some companies have not published their annual reports during the study period. Therefore, the final sample of the study consisted of 52 companies. The study relied on annual reports of the industrial companies listed in Amman Stock Exchange to collect data related to the independent variable represented by cash flows from the three main activities (operational, investment and financial activities) and the dependent variable of the stock market value for industrial companies listed, which was measured using the mean stock price for each year in the period included in the study.
The study followed the descriptive analytical approach for the period 2007-2016. In addition, with regards to data analysis, the study utilized various statistical methods appropriate for the study goals and hypotheses including, Principal Component Analysis, Partial Least Squares Method and fixed effect and random effect models to reach realistic and unbiased results on the effect of cash flows on the stock market of Jordanian industrial companies.

Show Results
The independent variable represented by cash flows from three main activities (cash flows from operational activities, cash flows from investment activities and cash flows from financial activities) and the dependent variable of stock market value for Jordanian industrial companies were assessed using the descriptive analysis of data by calculating the means and standard deviations as shown in Table (1).    Table (2) shows Pearson correlations analysis results for assessing the correlation between the independent and dependent variables and it indicates that the correlation was less than 0.8, which means that there was no linear regression error 1. To confirm the absence of multiple linear regression error in the results, which affects the coefficients' estimations for the study variables, the variance inflation factor (VIF) was tested. The rule of thumb followed states that variables with VIF of more than 10.0 are regarded as a problem of linear regression error. Table (3) shows that there was no multiple linear regression error in all models as the VIF was less than 10.0, which led to using the multiple regression formula, to assess the effect of cash flows on the stock market value.   (4) shows the results of the main hypothesis test and it shows that the cash flow from operational activities component had a statistically significant positive effect on stock market value among Jordanian industrial companies at (0.000) and this value is less than 0.05. In addition, the component of investment activities had a statistically significant positive effect on stock market value for Jordanian industrial companies with a value of (0.03). Meanwhile, no statistically significant effect was indicated for the financial activities on stock market value.
This result is in agreement with the results of Altamimi and Alqaysi (2012), which indicated a positive effect for cash flows on market value, but disagreed with that of Ala'moudi and Alkhayyal (2011), which revealed no positive effect of operational and investment cash flows on market value . On the other hand, this study result disagrees with Kharboush (2003) and Siam and Khaddash (2003), which indicated no relationship between financial cash flows and market value. The researcher attributes this disagreement to the different periods addressed in the two studies and moreover, Siam and Khaddash (2003) study addressed the industrial sector while Siam and Khaddash (2003) study addressed the trading and financial sector.

Testing the Study Sub-Hypotheses Sub H1: There is an effect of cash flows from operational activities on stock market value among industrial companies listed in Amman Stock Exchange.
 Comparing the OLS model with Fixed Effect model: based on the F-test, it was shown that the fixed effect model is better than the OSL model as F(63.575)=12.0802 and P-value = 0.000, and therefore, the fixed effect model was selected.  Comparing the OSL model with the Random Effect model: the Breuch and Bagan test was used to select the best model and results indicated that the random effect model was better than the OSL model as Chi=14.73 and P-value=0.000.  Comparing the Fixed Effect model with the Random Effect model: the Hausman test was used to select the best model and results indicated that the fixed effect model is better than the random effect model as chi=337.62 and P-value= 0.000. Therefore, the study adopted the fixed effect model to test the study first sub-hypothesis. Table (5) shows the results of the first sub-hypothesis test and from the table, it is evident that the component of cash flows from operational activities had a positive effect with a statistical significance of (0.000), (less than 0.05) on the stocks market value of Jordanian industrial companies. This result disagrees with that reported by Ala'moudi and Alkhayyal (2011) as the current study indicated a positive effect of cash flows from operational activities on stock market value, while their study indicated a reverse effect for cash flows of operational activities on stock market value. In contrast, this result is consistent with that of Altamimi and Alqaysi (2012), who found a positive effect of cash flows from operational activities on stock market value. Sub H2: There is an effect of cash flows from investment activities on stock market value among industrial companies listed in Amman Stock Exchange.
 Comparing the OLS model with the Fixed Effect model: based on the f-test, it was shown that the fixed effect model is better than the OLS model as f (63.575) = 53.6493 and P-value= 0.000. Therefore, the fixed effect model was adopted to test the second sub-hypothesis.  Comparing the OLS model and the Random Effect model: the Breuch and Bagan test was used to select the best model and results indicated that the random effect model was better than the OSL model as Chi=1115.80 and P-value=0.000.  Comparing the Fixed Effect model with the Random Effect model: the Hausman test was used to select the best model and results indicated that the fixed effect model is better than the random effect model as P-value= 0.000. Therefore, the study adopted the fixed effect model to test the study second sub-hypothesis.  This result is in agreement with that of Siam and Khaddash (2003) and that of Ala'moudi and Alkhayyal (2011), who found no effect of cash flows from investment activities on stock market value.
Sub H3: There is an effect of cash flows from financial activities on stock market value for industrial companies listed in Amman Stock Exchange.
 Comparing the OLS model with the Fixed Effect model: based on the f-test, it was shown that the fixed effect model is better than the OLS model as f (63.575) = 21.8886 and P-value= 0.000 and as such, the fixed effect model was adopted to test the second sub-hypothesis.  Comparing the OLS model and the Random Effect model: The Breuch and Bagan test was used to select the best model and results indicated that the random effect model was better than the OSL model as Chi=135.092 and P-value=0.000.  Comparing the Fixed Effect model with the Random Effect model: the Hausman test was used to select the best model and results indicated that the fixed effect model is better than the random effect model as P-value= 0.000. Thus, the current study adopted the fixed effect model to test the study's third sub-hypothesis. Table (7) shows the results of testing the third sub-hypothesis and it indicates that the component of cash flows from financial activities had a statistically significant negative effect at (0.000) on stocks' market value of Jordanian industrial companies and this value is less than (0.05).  Ala'moudi and Alkhayyal (2011), and that of Altamimi and Alqaysi (2012), who found a positive effect for cash flows from financial activities on market value and this is attributed to the different periods addressed in these studies. Meanwhile, the result is in agreement with that of Alsa'idi (2014) study that found no effect for cash flows from financial activities on market value.

Discussion
 Results of the first hypothesis indicated that the component of cash flows from operational activities had a statistically significant and positive effect at (0.000), which is less than (0.05) on stocks' market value among Jordanian industrial companies. In addition, the component of cash flows from investment activities had a statistically significant and positive effect at (0.03) on stocks' market value of Jordanian industrial companies, while no statistical significant effect was indicated for cash flows from financial activities on stocks' market value of Jordanian industrial companies.
 Results of the 1 st sub-hypothesis indicated that the component of cash flows from operational activities had a statistically significant and positive effect at (0.000), which is less than (0.05) on stocks' market value of Jordanian industrial companies.  Results of the 2 nd sub-hypothesis indicated statistically significant effect for cash flows from investment activities on stocks' market value among Jordanian industrial companies.  Results of the 3 rd sub-hypothesis indicated a negative effect at (0.000), which is less than (0.05) for cash flows from financial activities on stocks' market value among Jordanian industrial companies.

Recommendations
 Further studies have to be conducted to investigate the effect of cash flows on stocks' market value of Jordanian industrial sector and other sectors individually then addressing sectors altogether.  It is worth noting that the sample size and its provisions represented a limitation for analysis methods and some conclusions, therefore it is recommended to conduct more studies and research that include larger samples and above ten year-periods to be studied so as to conclude with more accurate and reliable findings.  The study recommends studying the industrial sector for its effective role in economic development and for its importance in the country gross product, which in turn, is reflected on facilitating the payments balance in case the country relies on exporting its industries.  It is also suggested to further examine the cash flows from operational and investment activities and their affect stocks' prices in Stock Exchange.  This study recommends using untraditional financial indexes to judge and define what affects a company's stock price in stock exchange in order to make appropriate financial and investment decisions.