The Effect of Intra-Group Loans on the Cash Flow Sensitivity of Cash: Evidence from Chile

42 Pages Posted: 5 Feb 2018

See all articles by Mauricio Jara-Bertin

Mauricio Jara-Bertin

University of Chile - Business School

Cristian A. Pinto-Gutierrez

University of Talca, Chile

Carlos Pombo

Universidad de los Andes, Colombia - School of Management

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Date Written: January 26, 2018

Abstract

We examine the effects of internal capital markets on the propensity of firms to save cash from cash flows (i.e., the cash flow sensitivity of cash). We argue that firms that are net providers of funds to related parties must maintain a higher cash flow sensitivity of cash to prevent high levels of pressure on their cash holdings in contrast to net receivers of intra-holding funds. Based on a panel of listed firms in Chile, we test this premise and examine how a firm’s differences in accounts receivable and accounts payable from related companies affects its cash flow sensitivity of cash. The results confirm that firms with high levels of net loans to related companies have higher cash flow sensitivities of cash and that this relationship is strongest for firms affiliated with business groups and family-owned firms. Furthermore, providers of funds that have the propensity for high savings are those firms that are more financially constrained suggesting that the cash flow sensitivity of cash is an adequate indicator to capture financing constraints.

Keywords: Internal capital markets, cash flow sensitivity of cash, pyramidal structure, business groups, financial constraints

JEL Classification: G32

Suggested Citation

Jara-Bertin, Mauricio Alejandro and Pinto-Gutierrez, Cristian A. and Pombo, Carlos, The Effect of Intra-Group Loans on the Cash Flow Sensitivity of Cash: Evidence from Chile (January 26, 2018). Documento CEDE No. 2018-08, Available at SSRN: https://ssrn.com/abstract=3116923 or http://dx.doi.org/10.2139/ssrn.3116923

Mauricio Alejandro Jara-Bertin (Contact Author)

University of Chile - Business School ( email )

Diagonal Paraguay 257
Santiago, Chile
Chile

Cristian A. Pinto-Gutierrez

University of Talca, Chile ( email )

2 Norte 685
Talca, 3460000
Chile

Carlos Pombo

Universidad de los Andes, Colombia - School of Management ( email )

Carrera Primera # 18A-12
Bogotá
Colombia
571-3394949 (Phone)

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