Financing constraints and firms’ cash policy in the euro area
AbstractThis 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. Contrary to previous evidence based mainly on US firms, 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 the 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. JEL Classification: D92, G3, G32
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0642.
Date of creation: Jun 2006
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Find related papers by JEL classification:
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G3 - Financial Economics - - Corporate Finance and Governance
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-28 (All new papers)
- NEP-CFN-2006-07-28 (Corporate Finance)
- NEP-EEC-2006-07-28 (European Economics)
- NEP-FIN-2006-07-28 (Finance)
- NEP-FMK-2006-07-28 (Financial Markets)
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