Financial Flexibility and Corporate Cash Policy

HKIMR Working Paper No. 05/2017

57 Pages Posted: 22 Mar 2017

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Jarrad Harford

University of Washington

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2017

Abstract

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

Chen, Tao and Harford, Jarrad and Lin, Chen, Financial Flexibility and Corporate Cash Policy (March 21, 2017). HKIMR Working Paper No. 05/2017. Available at SSRN: https://ssrn.com/abstract=2938306 or http://dx.doi.org/10.2139/ssrn.2938306

Tao Chen (Contact Author)

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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