The Impact of Liquidity Crises on Cash Flow Sensitivities

58 Pages Posted: 28 Aug 2013 Last revised: 31 Oct 2014

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Rebekka Haller

University of Hamburg

Iwan Meier

HEC Montreal - Department of Finance

Vefa Tarhan

Loyola University of Chicago - School of Business Administration; Northwestern University - Kellogg Graduate School of Management

Date Written: October 1, 2014

Abstract

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

Drobetz, Wolfgang and Haller, Rebekka and Meier, Iwan and Tarhan, Vefa, The Impact of Liquidity Crises on Cash Flow Sensitivities (October 1, 2014). 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=2315906 or http://dx.doi.org/10.2139/ssrn.2315906

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Rebekka Haller

University of Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Iwan Meier (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7 H2J 2K9
Canada
(514) 340-3198 (Phone)

Vefa Tarhan

Loyola University of Chicago - School of Business Administration ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States

Northwestern University - Kellogg Graduate School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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