The Impact of Liquidity Crises on Cash Flow Sensitivities
58 Pages Posted: 28 Aug 2013 Last revised: 31 Oct 2014
Date Written: October 1, 2014
Estimation of a multi-equation cash flow sensitivity model shows that capital market constraints vary with economic conditions. Since earlier studies use data that covers different economic conditions, their findings smooth-out effects of constraints during liquidity crises. We find that raising funds is relatively easy during benign liquidity conditions. However, even during less severe liquidity crises, firms experience capital market frictions. Financially weak firms cut investments moderately by rearranging their financing sources. The severe financial crisis of 2007-2009 strongly affected both financing and investment activities of financially weak firms. Healthy firms only had minor investment reductions due to their financial flexibility.
Keywords: Cash flow sensitivity, financial constraints, liquidity crises, investment spending, supply side shock
JEL Classification: G01, G31, G32
Suggested Citation: Suggested Citation