Why Do Firms Save Cash from Cash Flows? Evidence from Firm‐Level Estimation of Cash–Cash Flow Sensitivities

32 Pages Posted: 18 Dec 2014

See all articles by Bert D’Espallie

Bert D’Espallie

Hogeschool-Universiteit Brussel (HUBrussel)

Jolien Huybrechts

KIZOK- Centre for Entrepreneurship and Innovation / Hasselt University

Frederiek Schoubben

KU Leuven; KU Leuven

Date Written: December 2014

Abstract

We construct firm‐level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced‐form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.

Keywords: Cash holdings, Cash‐cash flow sensitivities, Firm‐level estimation, Bayesian estimation

Suggested Citation

D’Espallie, Bert and Huybrechts, Jolien and Schoubben, Frederiek, Why Do Firms Save Cash from Cash Flows? Evidence from Firm‐Level Estimation of Cash–Cash Flow Sensitivities (December 2014). Accounting & Finance, Vol. 54, Issue 4, pp. 1125-1156, 2014. Available at SSRN: https://ssrn.com/abstract=2539882 or http://dx.doi.org/10.1111/acfi.12027

Bert D’Espallie

Hogeschool-Universiteit Brussel (HUBrussel)

Stormstraat 2
Brussels, 1000
Belgium

Jolien Huybrechts

KIZOK- Centre for Entrepreneurship and Innovation / Hasselt University ( email )

Agoralaan - building D
Gebouw D
Diepenbeek, 3590
Belgium

Frederiek Schoubben

KU Leuven ( email )

Naamsestraat 69
B-3000 Leuven, 3000
Belgium

KU Leuven ( email )

FEB
Korte Nieuwstraat 33
Antwerp, 2000
Belgium

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