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

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Sudipto Dasgupta

Chinese University of Hong Kong, Lancaster University, and CEPR

George Wong

The Hong Kong Polytechnic University

Jiaquan Yao

Jinan University - Management School

Date Written: November 15, 2014

Abstract

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

Chang, Xin and Dasgupta, Sudipto and Wong, George and Yao, Jiaquan, Cash Flow Sensitivities and the Allocation of Internal Cash Flow (November 15, 2014). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2349050 or http://dx.doi.org/10.2139/ssrn.2349050

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, Lancaster University, and CEPR ( email )

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

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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