Cash Flow Sensitivities of Financial Decisions: Evidence from an Emerging Market

Prague Economic Papers

19 Pages Posted: 1 Apr 2020 Last revised: 19 Jun 2020

See all articles by Aysa Erdogan

Aysa Erdogan

Bogazici University, Department of Tourism Administration

Date Written: March 7, 2020

Abstract

This study investigates the sensitivity of financing, investment, and distribution decisions to changes in operating cash flow, and whether these sensitivities depend on whether or not firms are financially constrained. Using a sample of 2,650 firm-years of Turkish firms for the period 1996 to 2013, we find that an increase in the short-term cash flows is associated with an increase in cash balances, irrespective of whether or not firms are financially constrained. However, unconstrained firms hold a larger cash balance than constrained firms. Dividends are positively related to the short-term cash flows of both types of firms. Investments are not sensitive to cash flow for either type of firms. An increase in their short-term cash flow induces the financially constrained firms to reduce debt financing, but makes the unconstrained firms increase their debt financing and reduce equity financing. Although firms in general prefer to use part of the saved cash in the long term, they do not deplete their cash savings. Constrained firms resort to debt financing in response to an increase in their long-term cash flow.

Keywords: financial constraints, cash flow, investment, financing decisions, distribution decisions, capital structure

JEL Classification: C30, G30, G31, G32, G35

Suggested Citation

Erdogan, Aysa, Cash Flow Sensitivities of Financial Decisions: Evidence from an Emerging Market (March 7, 2020). Prague Economic Papers, Available at SSRN: https://ssrn.com/abstract=3550547

Aysa Erdogan (Contact Author)

Bogazici University, Department of Tourism Administration ( email )

Istanbul
Turkey
902123597114 (Phone)

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