The Effect of Stock Market Fluctuations on Corporate Cash Flows

41 Pages Posted: 18 Feb 2009

See all articles by Frédéric Boissay

Frédéric Boissay

Bank for International Settlements (BIS)

Murray Z. Frank

University of Minnesota

Reint Gropp

Halle Institute for Economic Research

Date Written: February 15, 2009

Abstract

Fluctuations in stock prices affect corporate cash flows. When a firm's own stock price drops significantly, the firm's customers are less likely to delay payment on invoices. In effect, customers are providing insurance to the firm. This insurance effect does not exist for private firms. However, overall customers delay payment on invoices from publicly traded firms 25 percent more often than they delay payment on invoices from private firms. The stock price of listed firms provides a costless signal to customers about the state of their supplier. As far as we can tell this is not driven by a difference in the average quality of the customers. Thus in terms of corporate cash flows there are both costs and benefits to being publicly traded. Stock market fluctuations are not a "side show" to the economy.

Keywords: cash flow, signalling, trade credit, stock market

JEL Classification: G32, G14, E44

Suggested Citation

Boissay, Frédéric and Frank, Murray Z. and Gropp, Reint, The Effect of Stock Market Fluctuations on Corporate Cash Flows (February 15, 2009). Available at SSRN: https://ssrn.com/abstract=1343760 or http://dx.doi.org/10.2139/ssrn.1343760

Frédéric Boissay

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Murray Z. Frank

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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