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The marginal value of cash, cash flow sensitivities, and bank-finance shocks in nonlisted firms

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  • Ostergaard, Charlotte
  • Sasson, Amir
  • Sørensen, Bent E

Abstract

We study how nonlisted 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 firms' trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flow. Our analysis suggests that shocks to external financing costs are transmitted to the real economy via firms' marginal value of cash.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8278.

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Date of creation: Feb 2011
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Handle: RePEc:cpr:ceprdp:8278

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Related research

Keywords: Bank Lending Channel; Cash Flow Trade-offs; Cash Holdings; External Financing Costs; Nonlisted Firms;

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  1. Adam B. Ashcraft, 2003. "Are banks really special? New evidence from the FDIC-induced failure of healthy banks," Staff Reports 176, Federal Reserve Bank of New York.
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