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Where Did All the Dollars Go? The Effect of Cash Flows on Capital and Asset Structure

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  • Dasgupta, Sudipto
  • Noe, Thomas H.
  • Wang, Zhen

Abstract

This paper documents the short- and long-term balance sheet effect of cash flows. We show that cash savings in the short run and debt reduction in both the short and the long run account for a substantial fraction of cash flow use. Although, in the long run, investment exhibits substantial sensitivity to cash flows, investment does not absorb the entire cash flow shock. In fact, the tighter the financial constraints, the smaller the fraction of cash flow absorbed by investment and the more by leverage reduction. Firms stage their response to increases in cash flow, delaying investment while building up cash stocks and reducing leverage. These results suggest that much of the short-run economic effect of cash flow shocks to the corporate sector may be channeled into the corporate debt market rather than the capital goods market, especially when financing constraints tighten.

Suggested Citation

  • Dasgupta, Sudipto & Noe, Thomas H. & Wang, Zhen, 2011. "Where Did All the Dollars Go? The Effect of Cash Flows on Capital and Asset Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(05), pages 1259-1294, November.
  • Handle: RePEc:cup:jfinqa:v:46:y:2011:i:05:p:1259-1294_00
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    Cited by:

    1. Davydova, Yulia & Sokolov, Vladimir, 2014. "The real effects of financial constraints: Evidence from a debt subsidization program targeted at strategic firms," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 247-265.
    2. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2011. "Do Phoenix miracles exist ? firm-level evidence from financial crises," Policy Research Working Paper Series 5799, The World Bank.
    3. Chay, J.B. & Park, Soon Hong & Kim, Soojung & Suh, Jungwon, 2015. "Financing hierarchy: Evidence from quantile regression," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 147-163.
    4. Hansen, Erwin & Wagner, Rodrigo, 2017. "Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 197-212.
    5. repec:eee:corfin:v:48:y:2018:i:c:p:579-596 is not listed on IDEAS
    6. Kusnadi, Yuanto, 2015. "Cross-listings and corporate cash savings: International evidence," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 91-107.
    7. repec:eee:quaeco:v:66:y:2017:i:c:p:225-239 is not listed on IDEAS
    8. repec:eee:jbrese:v:84:y:2018:i:c:p:1-10 is not listed on IDEAS
    9. Sasaki, Takafumi, 2016. "Financial cash flows and research and development investment," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 1-15.

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