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Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom

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  • Hansen, Erwin
  • Wagner, Rodrigo

Abstract

Some projects take time to build or are slow to yield cash flows. This may impact the dynamics of investment and liquidity management, although few studies test their financial implications. We exploit the peculiar advantages of copper mines as a laboratory to identify cash-flow sensitivities. In this context, investment decisions depend on the expectations of the long run price of the commodity, while the spread between the spot price and this long run expectations shifts current cash-flows. For this study we compiled a sample of copper firms between 2002 and 2012. We do not find significant effects of cash flow on current capital expenditures, but we do observe a systematic cash flow sensitivity of cash holdings, meaning that some of these transitory earnings are retained as liquidity. This cash stockpiling is stronger among financially constrained firms. In a context of time-to-build, our findings support financial theories emphasizing the salience of cash as buffer stock for liquidity in preparation for future investment opportunities.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jbfina:v:77:y:2017:i:c:p:197-212
    DOI: 10.1016/j.jbankfin.2017.01.015
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    Keywords

    Cash flow sensitivity of cash; Investment; Liquidity; Time-to-build;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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