Cash-Flow Sensitivities of Interdependent Corporate Decisions - The Role of Financial Constraints and Hedging Needs

34 Pages Posted: 15 Aug 2015 Last revised: 29 Nov 2017

See all articles by Christina E. Bannier

Christina E. Bannier

Justus-Liebig-University Giessen

Carolin Victoria Schürg

University of Giessen; Johannes Gutenberg University

Date Written: November 24, 2017

Abstract

We examine the cash-flow sensitivities of firms' simultaneous choice of investment, liquidity, dividends and net debt respectively equity financing in a large sample of US corporates between 1971 and 2016. We differentiate firms according to their (external) financial constraints and their (internal) needs to hedge against future shortfalls in operating income. Our estimation approach shows that financially constrained firms in our sample save more future funding capacity but invest and pay out less out of free cash flows than unconstrained firms. In the financial crisis 2007-2009, all firms invested less out of cash flow and raised their debt repayments, cash holdings and dividend payments. Constrained firms, however, show particularly strong increases in their cash savings but much smaller debt reductions compared to unconstrained firms - both in the crisis and post-crisis period. Internal hedging needs have different effects than external constraints: They weaken the build-up of future debt capacity out of cash flows for all firms, and raise the investment cash-flow sensitivity only for unconstrained firms.

Keywords: Cash-flow sensitivity, investment, debt issuance, cash holdings, dividend payments

JEL Classification: G31, G32

Suggested Citation

Bannier, Christina E. and Schürg, Carolin Victoria, Cash-Flow Sensitivities of Interdependent Corporate Decisions - The Role of Financial Constraints and Hedging Needs (November 24, 2017). Available at SSRN: https://ssrn.com/abstract=2643550 or http://dx.doi.org/10.2139/ssrn.2643550

Christina E. Bannier (Contact Author)

Justus-Liebig-University Giessen ( email )

Licher Str. 62
Gießen, 35394
Germany
+49 641 99 22551 (Phone)

Carolin Victoria Schürg

University of Giessen

BWL VI
Licher Straße 62
Giessen, 35394
Germany

Johannes Gutenberg University ( email )

Chair of Corporate Finance
Jakob-Welder-Weg 9
Mainz, 55128
Germany

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