Understanding Cash Flow Risk

64 Pages Posted: 26 Jun 2017 Last revised: 15 Dec 2020

See all articles by Sebastian Gryglewicz

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Enrique J. Schroth

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Philip Valta

University of Bern

Date Written: December 11, 2020

Abstract

Theory has recently shown that cash flow risk depends on the exposure of firms to short- and long-term cash flow shocks and the correlation between these shocks, with a higher correlation reducing risk. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions imposed by a canonical cash flow model. We show empirically that the estimated parameters have first-order effects on firms’ policies, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines that cash flow sensitivity of cash as predicted by theory.

Keywords: cash flow risk, permanent and transitory shocks, liquidity management

JEL Classification: G31, G32, G35

Suggested Citation

Gryglewicz, Sebastian and Mancini, Loriano and Morellec, Erwan and Schroth, Enrique J. and Valta, Philip, Understanding Cash Flow Risk (December 11, 2020). Swiss Finance Institute Research Paper No. 18-21, Available at SSRN: https://ssrn.com/abstract=2992202 or http://dx.doi.org/10.2139/ssrn.2992202

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Loriano Mancini

USI Lugano - Institute of Finance ( email )

Via Giuseppe Buffi 6
6904 Lugano, CH-6904
Switzerland
+41 (0)91 912 46 47 (Fax)

HOME PAGE: http://www.people.usi.ch/mancil/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Enrique J. Schroth

EDHEC Business School ( email )

393, Promenade Des Anglais
Nice, 06202
France
+33493186939 (Phone)

HOME PAGE: http://https://www.edhec.edu/en/faculty-and-researchers/schroth-enrique-phd

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

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