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Financing constraints and firms' cash policy in the euro area

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  • Rozalia Pal
  • Annalisa Ferrando
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    Abstract

    This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classification based on micro-data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing conditions, the internal cash flow is used in a systematic pattern for inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903075748
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 16 (2010)
    Issue (Month): 2 ()
    Pages: 153-171

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    Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:153-171

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    Web page: http://www.tandfonline.com/REJF20

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    Related research

    Keywords: financing conditions; cash policy decisions;

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    Cited by:
    1. 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.
    2. Carlos Carreira & Filipe Silva, 2012. "Where Are The Fragilities? The Relationship Between Firms' Financial Constraints, Size, And Age," Book Chapters, Institute of Economic Sciences.
    3. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    4. Carlos Carreira & Filipe Silva, 2013. "Do Size, Age and Dividend Policy Provide Useful Measures of Financing Constraints? New Evidence from a Panel of Portuguese Firms," GEMF Working Papers 2013-26, GEMF - Faculdade de Economia, Universidade de Coimbra.

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