IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v41y2006i04p787-808_00.html
   My bibliography  Save this article

Financial Development and the Cash Flow Sensitivity of Cash

Author

Listed:
  • Khurana, Inder K.
  • Martin, Xiumin
  • Pereira, Raynolde

Abstract

Prior research posits that market imperfections and the lack of institutions that protect investor interests create a divergence between the cost of internal and external funds, thereby constraining firms' ability to fund investment projects through external financing. Financial constraints force firms to manage their cash flows to finance potentially profitable projects. A related stream of research documents that financial constraints due to costly external financing are more pronounced in underdeveloped financial markets. We examine the influence of financial development on the demand for liquidity by focusing on how financial development affects the sensitivity of firms' cash holdings to their cash flows. Using firm-level data for 35 countries covering about 12,782 firms for the years 1994–2002, we find the sensitivity of cash holdings to cash flows decreases with financial development. We also consider additional implications of firms' cash flow sensitivity of cash with respect to firm size and business cycles. Overall, we provide new cross-country evidence of the role of financial development on financial constraints.

Suggested Citation

  • Khurana, Inder K. & Martin, Xiumin & Pereira, Raynolde, 2006. "Financial Development and the Cash Flow Sensitivity of Cash," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(4), pages 787-808, December.
  • Handle: RePEc:cup:jfinqa:v:41:y:2006:i:04:p:787-808_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109000002647/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:41:y:2006:i:04:p:787-808_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.