Financial Flexibility and Corporate Cash Policy

57 Pages Posted: 22 Mar 2017 Last revised: 8 Aug 2022

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2017


This working paper was written by Tao Chen (Nanyang Technological University), Jarrad Harford (University of Washington) and Chen Lin (The University of Hong Kong).

Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on firms’ cash policies. We find strong evidence that increases in debt capacity lead to smaller corporate cash reserves and declines in the marginal value of cash holdings. We further find that the decrease in cash holdings is more pronounced in firms with higher hedging needs, greater investment opportunities, financial constraints, better corporate governance and lower local real estate price volatility.

Keywords: Financial Flexibility, Collateral Value, Cash Policy, Real Estate Prices

JEL Classification: G32, G31, R30

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Financial Flexibility and Corporate Cash Policy (March 21, 2017). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 05/2017, Available at SSRN: or

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