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The Cash Flow Sensitivity of Cash


Heitor Almeida


University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Murillo Campello


Cornell University; National Bureau of Economic Research (NBER)

Michael S. Weisbach


Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

May 2003


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.

Number of Pages in PDF File: 34

Keywords: Cash flow sensitivity of cash, financial constraints, cash policy, macroeconomic innovations

JEL Classification: G31, G32, D23, D92

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Date posted: May 23, 2003  

Suggested Citation

Almeida, Heitor and Campello, Murillo and Weisbach, Michael S., The Cash Flow Sensitivity of Cash (May 2003). Available at SSRN: http://ssrn.com/abstract=345840 or http://dx.doi.org/10.2139/ssrn.345840

Contact Information

Heitor Almeida
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Murillo Campello (Contact Author)
Cornell University ( email )
114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
Michael S. Weisbach
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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