Misvaluation and Corporate Uses of Cash Flow

52 Pages Posted: 18 Jan 2012 Last revised: 8 Jun 2020

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Kaz, Wing Chun Kwok

The Hang Seng University of Hong Kong

George Wong

The Hong Kong Polytechnic University

Jiaquan Yao

Jinan University - Management School

Date Written: June 6, 2020

Abstract

We model how firms allocate internal cash flow across primary uses when they are misvalued in capital markets. All cash flow uses are jointly determined and interrelated by the identity that sources of funds equal uses of funds. Our model predicts that with an additional dollar of cash flow, more overvalued firms allocate more to substitute for costly external financing and less towards investment and cash savings. These predictions are confirmed empirically using an integrated regression framework that tracks all cash flow uses. Overall, our results imply that misvaluation impacts corporate decisions and the real economy through an internal financing channel.

Keywords: Cash flow, misvaluation, market inefficiencies, financial constraints, corporate policies

JEL Classification: G31, G32

Suggested Citation

Chang, Xin and Dasgupta, Sudipto and Kwok, Kaz and Wong, George and Yao, Jiaquan, Misvaluation and Corporate Uses of Cash Flow (June 6, 2020). Available at SSRN: https://ssrn.com/abstract=1987850 or http://dx.doi.org/10.2139/ssrn.1987850

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-01B-40 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: https://personal.ntu.edu.sg/changxin/

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

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

Kaz Kwok

The Hang Seng University of Hong Kong ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

George Wong

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kowloon, 0
Hong Kong
852 3400 3459 (Phone)
852 2330 9845 (Fax)

Jiaquan Yao

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

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