Why do firms save cash from cash flows? Evidence from firm-level estimation of cash-cash flow sensitivities

Bert D’Espallier · Jolien Huybrechts · Frederiek Schoubben

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

We construct firm-level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced-form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1988Financing Constraints and Corporate Investment 2002Investor Protection and Corporate Valuation 1999The determinants and implications of corporate cash holdings 2006Financial Constraints Risk 2004The Cash Flow Sensitivity of Cash

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