The Effect of Stock Market Fluctuations on Corporate Cash Flows
41 Pages Posted: 18 Feb 2009
Date Written: February 15, 2009
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: Suggested Citation