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

63 Pages Posted: 19 Sep 2008 Last revised: 30 Oct 2008

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Zhen Wang

Shanghai University - SHU-UTS SILC Business School

Date Written: September 18, 2008

Abstract

This paper documents the short and long term balance sheet effect of cash flow shocks. 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 positive cash flow shocks, delaying investment while building up cash flow 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 corporate debt market rather than capital goods market especially when financing constraints tighten.

Keywords: Cash Inflow, Cash Flow Sensitivity, Cash Flow Identity, Measurement Error

JEL Classification: G31, G32, G35

Suggested Citation

Dasgupta, Sudipto and Noe, Thomas H. and Wang, Zhen, Where Did All the Dollars Go? The Effect of Cash Flow Shocks on Capital and Asset Structure (September 18, 2008). Available at SSRN: https://ssrn.com/abstract=1270066 or http://dx.doi.org/10.2139/ssrn.1270066

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, ABFER, CEPR, and ECGI ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Zhen Wang

Shanghai University - SHU-UTS SILC Business School ( email )

China

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