The Marginal Value of Cash, Cash Flow Sensitivities, and Bank-Finance Shocks in Nonlisted Firms

FDIC Working Paper Series 2011-06

57 Pages Posted: 10 Jan 2012  

Charlotte Ostergaard

BI Norwegian Business School, Department of Finance

Amir Sasson

BI Norwegian Business School

Bent E. Sørensen

University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 7, 2011

Abstract

We study how nonlisted firms trade of financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect firms' trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flow. Our analysis suggests that shocks to external financing costs are transmitted to the real economy via firms' marginal value of cash.

Keywords: Cash Holdings, Cash Flow Trade-off s, External Financing Costs, Nonlisted

JEL Classification: G32, G21

Suggested Citation

Ostergaard, Charlotte and Sasson, Amir and Sørensen, Bent E., The Marginal Value of Cash, Cash Flow Sensitivities, and Bank-Finance Shocks in Nonlisted Firms (February 7, 2011). FDIC Working Paper Series 2011-06. Available at SSRN: https://ssrn.com/abstract=1982140 or http://dx.doi.org/10.2139/ssrn.1982140

Charlotte Ostergaard (Contact Author)

BI Norwegian Business School, Department of Finance ( email )

Nydalsveien 37
Oslo, 0442
Norway
+4746410520 (Phone)

HOME PAGE: http://home.bi.no/charlotte.ostergaard/

Amir Sasson

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47 46410621 (Phone)

Bent E. Sorensen

University of Houston - Department of Economics ( email )

204 McElhinney Hall
Houston, TX 77204-5882
United States
713-743-3841 (Phone)
713-743-3798 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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