The Role of Cash Holdings in Reducing Investment-Cash Flow Sensitivity: Evidence from a Financial Crisis Period in an Emerging Market

Posted: 10 Jun 2011

See all articles by Chris Florackis

Chris Florackis

University of Liverpool (UK)

Aydin Ozkan

Hull University Business School (HUBS)

Özgür Arslan-Ayaydin

University of Illinois at Chicago - Department of Finance

Date Written: February 11, 2006

Abstract

This paper investigates the relationship between financing constraints and investment cash flow sensitivities by focusing on cash holdings as the basic classification scheme to separate firms into finacially constrained and unconstrained categories. The idea is that high cash reserves increase the ability of firms to undertake profitable investment opportunities, especially of those firms that are exposed to greater market imperfections and, therefore, have difficult in accessing to external finance. Our classification scheme is based on an optimal cash model, which helps us to identify the firms that deviate significantly from their target cash ratio. We conduct the analysis for an emerging market, just before and during a financial crisis. The results show that constrained firms exhibit greater investment to cash flow sensitivities than unconstrained firms. Also, there is strong evidence that cash stands as a serious hedging device for firms mainly during the crisis period.

Keywords: Cash holdings, investment, financial constraints, financial crisis, emerging markets

JEL Classification: G31, G32

Suggested Citation

Florackis, Chris and Ozkan, Aydin and Arslan-Ayaydin, Özgür, The Role of Cash Holdings in Reducing Investment-Cash Flow Sensitivity: Evidence from a Financial Crisis Period in an Emerging Market (February 11, 2006). Emerging Markets Review, Vol. 7, No. 4, 2006. Available at SSRN: https://ssrn.com/abstract=1862158

Chris Florackis (Contact Author)

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Aydin Ozkan

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Özgür Arslan-Ayaydin

University of Illinois at Chicago - Department of Finance ( email )

601 South Morgan
University Hall Room:2416
Chicago, IL Illinois 60607
United States

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