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Why do firms save cash from cash flows? Evidence from firm-level estimation of cash–cash flow sensitivities

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  • Bert D'Espallier
  • Jolien Huybrechts
  • Frederiek Schoubben
  • Robert Faff

Abstract

type="main" xml:id="acfi12027-abs-0001"> We construct firm-level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced-form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.

Suggested Citation

  • Bert D'Espallier & Jolien Huybrechts & Frederiek Schoubben & Robert Faff, 2014. "Why do firms save cash from cash flows? Evidence from firm-level estimation of cash–cash flow sensitivities," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(4), pages 1125-1156, December.
    • Handle: RePEc:bla:acctfi:v:54:y:2014:i:4:p:1125-1156
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    File URL: http://hdl.handle.net/10.1111/acfi.2014.54.issue-4
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    Cited by:

    1. Robert W Faff & Stephen Gray & Kelvin Jui Keng Tan, 2016. "A contemporary view of corporate finance theory, empirical evidence and practice," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 662-686, November.
    2. Danni Chen & Xue Chen & Huiying Sun, 2023. "Does corporate social responsibility protect shareholder value from the shock of COVID‐19? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3077-3094, September.

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