Composition of Cash Flow Shocks, Firm Investment, and Cash Holdings
60 Pages Posted: 16 Oct 2016 Last revised: 18 Nov 2019
Date Written: November 15, 2019
We empirically examine the effect of exposure to temporary and persistent cash flow shocks on firm investment and its link with cash holdings. Theoretical models demonstrate that an expectation channel drives a wedge between the investment effects of temporary and persistent cash flow shocks, and the channel is stronger for firms with more prominent persistent shocks. We identify temporary and persistent cash flow shocks for individual firms using filtering methods and find strong evidence of the expectation channel as well as the predicted cross-sectional variation in its strength. Our results underscore the importance of distinguishing between persistent and temporary cash flow shocks in the analyses of corporate policies.
Keywords: Persistent and transitory shocks, corporate savings, corporate investment
JEL Classification: G30, G31, G32
Suggested Citation: Suggested Citation