Differences Between Savings from Equity Issuance and Savings from Cash Flow

41 Pages Posted: 12 Dec 2019 Last revised: 20 Apr 2020

See all articles by Yuejiao Duan

Yuejiao Duan

Nankai University - School of Finance

Frank M. Song

Economics and Management School, Wuhan University; Faculty of Business and Economics, The University of Hong Kong

Xiao Zhang

Nankai University - School of Finance

Peng Zhou

Economics and Management School, Wuhan University

Date Written: April 9, 2020

Abstract

Firms have different choices of using equity issuance and cash flow to save. Empirically, we find three differences between savings from equity issuance and cash flow. First, firms may not increase or decrease the savings rates of equity issuance and cash flow at the same time. Second, the savings rate of equity issuance is higher than that of cash flow. Third, in 1985-2016, the savings rate of equity issuance increases more than that of cash flow. To investigate the differences, we analyze the cash-savings motives from the following perspectives: growth options, financial constraints, and equity overvaluation. Our theory predicts that the savings rate of equity issuance increases in the above three scenarios, whereas the savings rate of cash flow only increases because of financial constraints. Empirical results suggest that the savings motives result in the first difference and the growth of intangible investment causes the second and third differences.

Keywords: precautionary saving; savings rate; growth options; financial constraints; market timing

JEL Classification: G30; G31; G32

Suggested Citation

Duan, Yuejiao and Song, Frank and Zhang, Xiao and Zhou, Peng, Differences Between Savings from Equity Issuance and Savings from Cash Flow (April 9, 2020). Available at SSRN: https://ssrn.com/abstract=3488223 or http://dx.doi.org/10.2139/ssrn.3488223

Yuejiao Duan

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Frank Song

Economics and Management School, Wuhan University ( email )

Hubei
China

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

Pokfulam Road
Hong Kong
China

Xiao Zhang (Contact Author)

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Peng Zhou

Economics and Management School, Wuhan University ( email )

Hu-Bei
China

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