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The cash flow sensitivity of cash (2004)
| Venue: | Journal of Finance |
| Citations: | 276 - 27 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.
Keyphrases
cash flow sensitivity financial constraint positive cash flow sensitivity firm cash 1971-2000 period firm policy unconstrained firm incremental cash inflow new test useful method large sample constrained firm firm demand unconstrained firm cash saving cash flow manufacturing firm cash increase firm propensity macroeconomic innovation
