Cash Flow Sensitivities and the Allocation of Internal Cash Flow
Review of Financial Studies, Forthcoming
53 Pages Posted: 3 Nov 2013 Last revised: 27 Jun 2018
Date Written: November 15, 2014
We study how firms allocate cash flow by estimating the cash-flow sensitivities of various uses of cash flow. We decompose cash flow into a transitory and a permanent component and focus on the allocation of the transitory component, which by construction contains little information about future growth opportunities. We find that more financially constrained firms allocate more transitory cash flow to cash savings and direct less toward investment than do less constrained firms, consistent with constrained firms accumulating liquidity to buffer against future financial constraints. We also illustrate several methodological advantages of our approach over alternative methods in previous studies.
Keywords: Cash Flow Sensitivity, Internal Cash Flow, Higher-order GMM, Beveridge-Nelson Decomposition
JEL Classification: G31, G32
Suggested Citation: Suggested Citation