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Real and financial tradeoffs in non-listed firms: Cash flow sensitivities and how they change with shocks to firms' main-bank

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Author Info

  • Charlotte Østergaard

    ()
    (Norwegian School of Management and Norges Bank (Central Bank of Norway))

  • Amir Sasson

    (Norwegian School of Management)

  • Bent E. Sørensen

    (University of Houston and the CEPR)

Abstract

We study how non-listed firms trade off financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect corporate trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flows. Our analysis suggests that external finance constraints affect the real economy via firms' marginal value of cash.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2010/WP-201027/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2010/27.

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Length: 53 pages
Date of creation: 16 Dec 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_27

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Related research

Keywords: Cash Management; Cash Holdings; Cost of External Finance; Non_listed Firms; Bank Lending Channel;

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