Stockpiling Cash When It takes Time to Build: Exploring Price Differentials in a Commodity Boom

71 Pages Posted: 30 Oct 2015 Last revised: 19 Jan 2017

See all articles by Erwin Hansen

Erwin Hansen

University of Chile - Department of Business Administration

Rodrigo Andres Wagner

UAI Business School ; Growth Lab - Harvard University (Center for Int. Development)

Date Written: October 5, 2016

Abstract

Some projects take time to build or are slow to yield cash flows. This may impact the dynamics of investment and liquidity management, although few studies test their financial implications. We exploit the peculiar advantages of copper mines as a laboratory to identify cash-flow sensitivities. In this context, investment decisions depend on the expectations of the long run price of the commodity, while the spread between the spot price and this long run expectations shifts current cash-flows. For this study we compiled a sample of copper firms between 2002 and 2012. We do not find significant effects of cash flow on current capital expenditures, but we do observe a systematic cash flow sensitivity of cash holdings, meaning that some of these transitory earnings are retained as liquidity. This cash stockpiling is stronger among financially constrained firms. In a context of time-to-build, our findings support financial theories emphasizing the salience of cash as buffer stock for liquidity in preparation for future investment opportunities.

Keywords: Cash flow sensitivity of cash, investment, liquidity, time-to-build, spot future spread

JEL Classification: G31, G32, F23, F21, F32

Suggested Citation

Hansen, Erwin and Wagner, Rodrigo Andres, Stockpiling Cash When It takes Time to Build: Exploring Price Differentials in a Commodity Boom (October 5, 2016). Available at SSRN: https://ssrn.com/abstract=2682890 or http://dx.doi.org/10.2139/ssrn.2682890

Erwin Hansen

University of Chile - Department of Business Administration ( email )

Diagonal Paraguay 257
Santiago, 8330015
Chile

Rodrigo Andres Wagner (Contact Author)

UAI Business School

Diagonal Las Torres 2700
Penalolen
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/rodrigoawagner

Growth Lab - Harvard University (Center for Int. Development) ( email )

79 John F. Kennedy Street
Cambridge, MA MA 02138
United States

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