Why Is the Cash-Flow Sensitivity of Cash Increasing?

Posted: 12 Jul 2019 Last revised: 25 Oct 2019

See all articles by Michael Machokoto

Michael Machokoto

University of Northampton

Boulis Maher Ibrahim

Heriot Watt University

Amandeep Sahota

University of Strathclyde - Strathclyde Business School

Date Written: July 12, 2019

Abstract

The few studies that examine the cash-flow sensitivity of cash (CFSC) report mixed and conflicting results. However, we note a marked increase in the CFSC of US firms from 1971 to 2015 that is pervasive and robust to standard controls used in the literature. On average, this sensitivity has doubled over the past four decades. We use an augmented model that incorporates the asymmetry arising from investments in Research and Development (R&D) to examine time variation in the CFSC. The results, which are robust to measurement errors in Tobin’s q, show that the increase in the CFSC is attributable to firms that invest in R&D and not to firms that do not report R&D. This suggests that the accumulation of cash holdings is important to the former type of firm, as it is often used to smoothen or hedge likely future shortfalls. The results further show that the CFSC is negative only for firms that do not report R&D, while it increases and changes from negative to positive for firms that report R&D. Thus, significant time variation and asymmetry in the CFSC help explain the mixed results in the literature.

Keywords: cash, cash-flow sensitivity of cash, R&D, financial constraints

JEL Classification: G01, G30, G32

Suggested Citation

Machokoto, Michael and Ibrahim, Boulis Maher and Sahota, Amandeep, Why Is the Cash-Flow Sensitivity of Cash Increasing? (July 12, 2019). Available at SSRN: https://ssrn.com/abstract=3416235 or http://dx.doi.org/10.2139/ssrn.3416235

Michael Machokoto (Contact Author)

University of Northampton ( email )

Faculty of Art, Science & Technology,
Northampton, NN2 6JD
United Kingdom
1604893484 (Phone)
NN1 5PH (Fax)

Boulis Maher Ibrahim

Heriot Watt University ( email )

Accountancy, Economics and Finance Department
Riccarton
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://www.hw.ac.uk

Amandeep Sahota

University of Strathclyde - Strathclyde Business School ( email )

100 Cathedral Street
Glasgow G1 1XU
United Kingdom

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