The Marginal Value of Cash, Cash Flow Sensitivities, and Bank-Finance Shocks in Nonlisted Firms
BI Norwegian Business School, Department of Finance
BI Norwegian Business School
Bent E. Sørensen
University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)
February 7, 2011
FDIC Working Paper Series 2011-06
We study how nonlisted firms trade of financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect firms' trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flow. Our analysis suggests that shocks to external financing costs are transmitted to the real economy via firms' marginal value of cash.
Number of Pages in PDF File: 57
Keywords: Cash Holdings, Cash Flow Trade-offs, External Financing Costs, Nonlisted
JEL Classification: G32, G21
Date posted: January 10, 2012
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