5.1 The Estimation Procedure
If empirical data is available on yearly capital expenditures in
different classes, as well as on the average life-spans of fixed assets in the various classes.
Formula (18) is applied in estimating profitability. If either data
is unobtainable, (11) is used instead. In that case the annual
capital expenditures of the firm are calculated as a lumpsum from
the financial statements of the business enterprise considered, and
the life-span N is estimated e.g. as an industry average of all
fixed assets. Such data is available._5 The categories of fixed
assets used in the application to be presented shortly are 1)
Construction in process, 2) Land, water, bonds and shares, 3)
Buildings, and 4-5) Two classes of machinery and equipment.
Growth-rate g has normally been estimated from the empirical time-series of funds from operations in applications of the model._6 The seemingly unrelated regression technique can be used in troublesome cases._7
The components of the long-run financing policy are computed as the
weighted sum of the yearly observations of the empirical
counterparts of the items of the funds-flow statement. These
empirical counterparts are easily computed from the annual income
statements and the balance sheets of a business enterprise. Details
of these computations are omitted here._8 The estimated growth
factors are used as the
weights. (For example, if
= 0.10, the
second set of observations is divided by 1.10, the third by 1.21,
etc.) Profit financing, i.e. undistributed profit or change in
retained earnings, is defined as the funds provided by operations Q
less depreciation D, interest expense I, income taxes T, and
dividends V.
The theoretical depreciation ratio D is estimated from (29). Formula
(28) is used instead if the more detailed information required by
(29) is not empirically available. The depreciation policy of a
business enterprise is described by comparing D with the observed
ratio of depreciation on books, denoted . A positive difference
indicates that the firm has utilized accelerated depreciation as a
means of generating undisclosed profit financing. A negative
difference indicates propped up disclosed profits. It should be
stressed, however, that accelerating or decelerating depreciation is
by no means the only way of adjusting disclosed profits. Depending
on the legislation in the relevant country changes of reserves,
deferring taxes, etc. can be used, too. In Finland utilizing an
inventory write- off reserve (a kind of stock appreciation), allowed
by tax-laws up to 50 per cent of the historical acquisition cost
(FIFO), is of special importance in adjusting the disclosed profits
in business practice._9
5.2 Long-Run Profitability, Growth, and Financing Behavior of Eight Major Finnish Pulp and Paper Firms
The empirical results concerning the eight most important Finnish firms producing mainly pulp and paper are given below. The firms are Enso Gutzeit (sales turnover in 1980 3745.2 million Finnish marks 10), Kajaani (FIM 804.6 million), Kaukas (1010.0), Kymi Kymmene (2028.2), Metsäliiton Teollisuus (1293.9), Wilh. Schauman (1542.9), Serlachius (1637.6), and Yhtyneet Paperitehtaat (2583.0). The analysis is based on deflated time-series for 1970-1980 derived from the financial statements of these firms. The time series are deflated in order to obtain the growth and profitability estimates in real terms. The information concerning the capital expenditures in the different classes was obtained from the firms. Because of space limitations the details of the statistical analysis of the time-series are not repeated here._11 For the same reason the empirical results are given in Table 1 without further interpretation._12
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6 See Salmi (1982) for details.
7 See Luoma & Ruuhela (1980).
8 See Salmi (1980, pp. 17-20 and 27) for details.
9 See Jägerhorn & Troberg (1981) for the current accounting
practices in publicly traded Finnish companies. For the relevant
Finnish legislation a foreign reader is referred to Price &
Waterhouse (1979).
10 The average exchange rates in 1980 were 1 USD = 3.730 EIM, 1
GBP = 8.691 FIM, and 1 DEM= 2.0558 FIM.
11 For the outlines of the statistical analysis see Salmi (1980, Ch.
3). One detail should be brought up here, in addition. For the
capital expenditure classes of land, water, bonds and shares as well
as construction in process the life-span is deemed infinite. Changes
in net working assets are also treated as capital expenditures.
These features are easily accomodated in the estimation by letting
the relevant Nk:s go to infinity in formulas (16), (18), and
(29).
12 A Finnish reader is referred to the writtings by Timo Salmi in
the Finnish Business Daily (Kauppalehti) for analyses of Finnish
firms in other branches. Ruuhela presented recently results on
Finnish publicly traded companies also in Kauppalehti(16th March,
1982).
5 For information see Artto (1980, pp. 27-29), and
Yritystutkimusneuvottelukunta.
The next section (References)
The
previous section (4 Long-Run Financing Policy)
The contents section of Ruuhela, Salmi, Luoma and Laakkonen (1982)
Other scientific publications by Timo Salmi in WWW format