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Financial Constraints and the Cash-Holding Behaviour of Canadian Firms

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  • Darcey McVanel
  • Nikita Perevalov
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    Abstract

    The proportion of assets held by the average Canadian firm in the form of cash has increased steadily since the early 1990s, and is now roughly twice as large as in 1990. The literature has established that the cash-holding behaviour of firms is highly correlated with financial constraints and firm characteristics. The authors use a firm-level data set covering Canadian firms from 1980 to 2006 to understand which firm characteristics are associated with higher cash holdings. They find that financial constraints are likely important for explaining firms' higher cash holdings, and that the recent increase in the cash holdings of Canadian firms can be almost entirely explained by changes in firm characteristics. Specifically, higher recent cash holdings are correlated with the average Canadian firm having become smaller, having more variable cash flow, holding lower levels of cash substitutes, having higher expenditure on research and development, and being more likely to be financially distressed. The authors also find that the average Canadian firm has a cash ratio that is only slightly higher than would be predicted by out-of-sample forecasts over the 1990s and 2000s, though the divergence between the actual and predicted values has been increasing in recent years.

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    File URL: http://www.bankofcanada.ca/en/res/dp/2008/dp08-16.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Discussion Papers with number 08-16.

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    Length: 39 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:bca:bocadp:08-16

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    Keywords: Sectoral balance sheet;

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    Cited by:
    1. Aleksander Berentsen & Mariana Rojas Breu & Shouyong Shi, 2009. "Liquidity, innovation and growth," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 441, Institute for Empirical Research in Economics - University of Zurich, revised Oct 2012.

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