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The cash flow sensitivity of cash: evidence from Taiwan

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  • Yi-Chen Lin

Abstract

This article examines the role of operating cash flow in firm cash policies using an unbalanced panel of 988 Taiwanese firms. The main findings are as follows: (i) Both financially constrained and unconstrained firms display positive cash flow sensitivity of cash, indicating that capital market friction is prevalent in Taiwan. The result is in sharp contrast to the US result in Almeida et al. (2004) in that only constrained firms save cash out of their operating cash flow. (ii) The estimated cash flow sensitivity of cash for financially constrained firms is significantly higher than that of financially constrained firms in the USA. Our results imply that a financially constrained firm (i.e. a firm that is younger, has a looser relation with banks, or has negative investment-dividend correlation) saves 0.246 to 0.307 dollar out of an additional dollar of operating cash flow. An unconstrained firm saves 0.024 to 0.101 less dollars. (iii) Firms that have ever issued public debt save more cash out of their operating cash flow than firms that have never issued public debt. (iv) Omitting net debt and equity issuances from the cash regression produces downward-biased cash-cash flow sensitivity estimates.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100600749329
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 17 (2007)
Issue (Month): 12 ()
Pages: 1013-1024

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Handle: RePEc:taf:apfiec:v:17:y:2007:i:12:p:1013-1024

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Cited by:
  1. Filipe Silva & Carlos Carreira, 2010. "Financial constraints: Are there differences between manufacturing and services?," GEMF Working Papers 2010-16, GEMF - Faculdade de Economia, Universidade de Coimbra.
  2. Filipe SIlva & Carlos Carreira, 2011. "Financial constraints and exports: An analysis of Portuguese firms during the European monetary integration," GEMF Working Papers 2011-13, GEMF - Faculdade de Economia, Universidade de Coimbra.
  3. Rozalia Pal & Roman Kozhan, 2008. "Firms' Investment under Financial Constraints: A Euro Area Investigation," Working Papers wp08-07, Warwick Business School, Finance Group.
  4. Carlos Carreira & Filipe Silva, 2012. "Where Are The Fragilities? The Relationship Between Firms' Financial Constraints, Size, And Age," Book Chapters, Institute of Economic Sciences.
  5. Filipe Silva & Carlos Carreira, 2012. "Measuring Firms' Financial Constraints: A Rough Guide," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 36, pages 23-46, December.
  6. Filipe Silva & Carlos Carreira, 2011. "Do financial constraints threat the innovation process? Evidence from Portuguese firms," GEMF Working Papers 2011-10, GEMF - Faculdade de Economia, Universidade de Coimbra, revised Oct 2011.
  7. Filipe Silva & Carlos Carreira, 2010. "Measuring firms’ financial constraints: Evidence for Portugal through different approaches," GEMF Working Papers 2010-15, GEMF - Faculdade de Economia, Universidade de Coimbra.

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