Composition of Cash Flow Shocks, Firm Investment, and Cash Holdings

60 Pages Posted: 16 Oct 2016 Last revised: 18 Nov 2019

See all articles by Seong K. Byun

Seong K. Byun

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Valery Polkovnichenko

Federal Reserve Board - Divison of Research and Statistics

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 15, 2019

Abstract

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

Byun, Seong K. and Polkovnichenko, Valery and Rebello, Michael J., Composition of Cash Flow Shocks, Firm Investment, and Cash Holdings (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=2852545 or http://dx.doi.org/10.2139/ssrn.2852545

Seong K. Byun

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Valery Polkovnichenko (Contact Author)

Federal Reserve Board - Divison of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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