Where Did All the Dollars Go? The Effect of Cash Flows on Capital and Asset Structure

Sudipto Dasgupta · Thomas H. Noe · Zhen Wang

92 citations0/0 files storedJournal of Financial and Quantitative Analysis

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

Abstract

Abstract This paper documents the short- and long-term balance sheet effect of cash flows. We show that cash savings in the short run and debt reduction in both the short and the long run account for a substantial fraction of cash flow use. Although, in the long run, investment exhibits substantial sensitivity to cash flows, investment does not absorb the entire cash flow shock. In fact, the tighter the financial constraints, the smaller the fraction of cash flow absorbed by investment and the more by leverage reduction. Firms stage their response to increases in cash flow, delaying investment while building up cash stocks and reducing leverage. These results suggest that much of the short-run economic effect of cash flow shocks to the corporate sector may be channeled into the corporate debt market rather than the capital goods market, especially when financing constraints tighten.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1977Determinants of corporate borrowing 2008The cost of capital, corporation finance and the theory of investment 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1988Financing Constraints and Corporate Investment 1969A General Equilibrium Approach To Monetary Theory

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