Understanding Cash Flow Risk
90 Pages Posted: 26 Jun 2017 Last revised: 15 Jul 2021
Date Written: July 9, 2021
Theory has recently shown that corporate policies should depend on firms' exposure to short- and long-lived cash flow shocks and the correlation between these shocks. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions of a canonical cash flow model. As predicted by theory, we find that the estimated parameters are strongly related to corporate liquidity and financing choices, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines the cash flow sensitivity of cash.
Keywords: cash flow risk, permanent and transitory shocks, liquidity management
JEL Classification: G31, G32, G35
Suggested Citation: Suggested Citation