The cash flow sensitivity of cash (2004)
| Venue: | Journal of Finance |
| Citations: | 50 - 8 self |
BibTeX
@ARTICLE{Almeida04thecash,
author = {Heitor Almeida and Murillo Campello and Michael S. Weisbach and Jon Garfinkle and Charlie Hadlock and Jarrad Harford and George Pennacchi and René Stulz and Toni Whited},
title = {The cash flow sensitivity of cash},
journal = {Journal of Finance},
year = {2004},
pages = {1777--1804}
}
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Abstract
We use the link between financial constraints and a firm’s demand for liquidity to develop a new test of the effect of financial constraints on firm policies. The effect of financial constraints can be captured by a firm’s propensity to save cash out of incremental cash inflows (the cash flow sensitivity of cash). While constrained firms should have a positive cash flow sensitivity of cash, unconstrained firms ’ cash savings should not be systematically related to cash flows. We estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971-2000 period and find that firms that are more likely to be financially constrained display a significantly positive cash flow sensitivity of cash, while unconstrained firms do not. Also consistent with our argument, we find that constrained firms ’ cash flow sensitivity of cash increases during recessions, while unconstrained firms ’ cash—cash flow sensitivity is unaffected by macroeconomic innovations. The use of cash flow sensitivities of cash appears to be a theoretically justified, empirically useful method to test for the importance of financial constraints.
