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The impact of liquidity crises on cash flow sensitivities

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  • Drobetz, Wolfgang
  • Haller, Rebekka
  • Meier, Iwan
  • Tarhan, Vefa

Abstract

We examine the relationship between liquidity crises and frictions in raising funds, and find that both the gap between the cash flow sensitivities of financially healthy and weak firms and the cash flow sensitivities of healthy and weak firms themselves are positively correlated with the severity of liquidity crises. Using a multi-equation model of cash flow sensitivities, we find that moderate liquidity crises mostly affect firms’ financing activities. The recent financial crisis was especially severe for financially weak firms and curtailed both their investment and financing decisions. Financially healthy firms were able to protect their investments by maintaining financial flexibility.

Suggested Citation

  • Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan & Tarhan, Vefa, 2017. "The impact of liquidity crises on cash flow sensitivities," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 225-239.
  • Handle: RePEc:eee:quaeco:v:66:y:2017:i:c:p:225-239
    DOI: 10.1016/j.qref.2017.03.004
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    1. repec:eee:finsta:v:39:y:2018:i:c:p:28-45 is not listed on IDEAS
    2. repec:eee:transe:v:122:y:2019:i:c:p:78-99 is not listed on IDEAS

    More about this item

    Keywords

    Cash flow sensitivity; Financial constraints; Liquidity crises; Investment spending; Supply side shock;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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

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