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Asymmetric cash flow sensitivity of cash holdings

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  • Bao, Dichu
  • Chan, Kam C.
  • Zhang, Weining

Abstract

Almeida, Campello, and Weisbach (2004) and Riddick and Whited (2009) offer contrasting conclusions regarding the corporate cash flow sensitivity of cash. We use an augmented empirical model to affirm the conclusion in Riddick and Whited that the cash flow sensitivity of cash is generally negative. In addition, we contend that the cash flow sensitivity of cash is asymmetric to cash flow. The asymmetry may be due to several reasons, including binding project contracts, bad news withholding, and agency costs. Using a sample of manufacturing firms from 1972 to 2006, we document that the cash flow sensitivity of cash is negative when a firm faces a positive cash flow environment, supporting Riddick and Whited (2009), but the cash flow sensitivity of cash is positive when a firm faces negative cash flows. We further divide firms into financially constrained and unconstrained ones and find that the cash flow sensitivity of cash asymmetry continues to hold in both groups. When we use institutional holding as a control for the agency problem, we find that firms with better outside monitoring dissave to capture good investment opportunities. All the results support our hypotheses that firms have different levels of responses to their cash holdings when facing positive and negative cash flows.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 4 ()
Pages: 690-700

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Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:690-700

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Cash flow sensitivity; Cash holdings; Asymmetry;

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References

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  1. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, 08.
  2. Bates, Thomas W. & Kahle, Kathleen M. & Stulz, Rene M., 2007. "Why Do U.S. Firms Hold So Much More Cash Than They Used To?," Working Paper Series 2006-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Leigh A. Riddick & Toni M. Whited, 2009. "The Corporate Propensity to Save," Journal of Finance, American Finance Association, vol. 64(4), pages 1729-1766, 08.
  4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  5. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
  6. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
  7. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
  8. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  10. S. P. Kothari & Susan Shu & Peter D. Wysocki, 2009. "Do Managers Withhold Bad News?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 241-276, 03.
  11. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
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