IDEAS home Printed from https://ideas.repec.org/a/eee/quaeco/v66y2017icp225-239.html
   My bibliography  Save this article

The impact of liquidity crises on cash flow sensitivities

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062976917300959
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.qref.2017.03.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    2. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    3. Lemmon, Michael L. & Zender, Jaime F., 2010. "Debt Capacity and Tests of Capital Structure Theories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1161-1187, October.
    4. 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(5), pages 1259-1294, October.
    5. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    6. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 1-39, March.
    7. John V. Duca, 2013. "The Money Market Meltdown of the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 493-504, March.
    8. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2011. "Liquidity Management and Corporate Investment During a Financial Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1944-1979.
    9. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
    10. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    11. Duca, John V., 2013. "Did the commercial paper funding facility prevent a Great Depression style money market meltdown?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 747-758.
    12. Nathalie Moyen, 2004. "Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms," Journal of Finance, American Finance Association, vol. 59(5), pages 2061-2092, October.
    13. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    14. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
    15. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    16. Spindt, Paul A & Tarhan, Vefa, 1980. "Liquidity Structure Adjustment Behavior of Large Money Center Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(2), pages 198-208, May.
    17. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    18. Stephen R. Bond & Måns Söderbom, 2013. "Conditional Investment–Cash Flow Sensitivities And Financing Constraints," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 112-136, February.
    19. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    20. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    21. Bhagat, Sanjai & Moyen, Nathalie & Suh, Inchul, 2005. "Investment and internal funds of distressed firms," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 449-472, June.
    22. Vladimir A. Gatchev & Todd Pulvino & Vefa Tarhan, 2010. "The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities," Journal of Finance, American Finance Association, vol. 65(2), pages 725-763, April.
    23. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    24. R. David Mclean & Mengxin Zhao, 2014. "The Business Cycle, Investor Sentiment, and Costly External Finance," Journal of Finance, American Finance Association, vol. 69(3), pages 1377-1409, June.
    25. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    26. Allayannis, George & Mozumdar, Abon, 2004. "The impact of negative cash flow and influential observations on investment-cash flow sensitivity estimates," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 901-930, May.
    27. Francis, Bill & Hasan, Iftekhar & Song, Liang & Waisman, Maya, 2013. "Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets," Emerging Markets Review, Elsevier, vol. 15(C), pages 57-71.
    28. Lins, Karl V. & Strickland, Deon & Zenner, Marc, 2005. "Do Non-U.S. Firms Issue Equity on U.S. Stock Exchanges to Relax Capital Constraints?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(1), pages 109-133, March.
    29. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    30. Leonardo Becchetti & Annalisa Castelli & Iftekhar Hasan, 2010. "Investment–cash flow sensitivities, credit rationing and financing constraints in small and medium-sized firms," Small Business Economics, Springer, vol. 35(4), pages 467-497, November.
    31. Fama, Eugene F. & French, Kenneth R., 2005. "Financing decisions: who issues stock?," Journal of Financial Economics, Elsevier, vol. 76(3), pages 549-582, June.
    32. Chen, Huafeng (Jason) & Chen, Shaojun (Jenny), 2012. "Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series," Journal of Financial Economics, Elsevier, vol. 103(2), pages 393-410.
    33. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    34. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    35. Gayané Hovakimian, 2009. "Determinants of Investment Cash Flow Sensitivity," Financial Management, Financial Management Association International, vol. 38(1), pages 161-183, March.
    36. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    37. Xin Chang & Sudipto Dasgupta & George Wong & Jiaquan Yao, 2014. "Cash-Flow Sensitivities and the Allocation of Internal Cash Flow," Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3628-3657.
    38. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
    39. Armen Hovakimian & Gayané Hovakimian, 2009. "Cash Flow Sensitivity of Investment," European Financial Management, European Financial Management Association, vol. 15(1), pages 47-65, January.
    40. Atif Mian & Amir Sufi, 2014. "What Explains the 2007–2009 Drop in Employment?," Econometrica, Econometric Society, vol. 82, pages 2197-2223, November.
    41. Kahle, Kathleen M. & Stulz, René M., 2013. "Access to capital, investment, and the financial crisis," Journal of Financial Economics, Elsevier, vol. 110(2), pages 280-299.
    42. Juan M. Sanchez & Emircan Yurdagul, 2013. "Why are U.S. firms holding so much cash? an exploration of cross-sectional variation," Review, Federal Reserve Bank of St. Louis, vol. 95(July), pages 293-325.
    43. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    44. Kadapakkam, Palani-Rajan & Kumar, P. C. & Riddick, Leigh A., 1998. "The impact of cash flows and firm size on investment: The international evidence," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 293-320, March.
    45. Gatchev, Vladimir A. & Spindt, Paul A. & Tarhan, Vefa, 2009. "How do firms finance their investments?: The relative importance of equity issuance and debt contracting costs," Journal of Corporate Finance, Elsevier, vol. 15(2), pages 179-195, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Drobetz, Wolfgang & Ehlert, Sebastian & Schröder, Henning, 2021. "Institutional ownership and firm performance in the global shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 146(C).
    2. Abed Al‐Nasser Abdallah & Wissam Abdallah & Mohsen Saad, 2020. "Institutional characteristics, investment sensitivity to cash flow and Tobin's q: Evidence from the Middle East and North Africa region," International Finance, Wiley Blackwell, vol. 23(2), pages 324-339, August.
    3. Drobetz, Wolfgang & El Ghoul, Sadok & Guedhami, Omrane & Janzen, Malte, 2018. "Policy uncertainty, investment, and the cost of capital," Journal of Financial Stability, Elsevier, vol. 39(C), pages 28-45.
    4. Gül, Selçuk & Taştan, Hüseyin, 2020. "The impact of monetary policy stance, financial conditions, and the GFC on investment-cash flow sensitivity," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 692-707.
    5. Mirza, Nawazish & Rahat, Birjees & Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2023. "Impact of Covid-19 on corporate solvency and possible policy responses in the EU," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 181-190.
    6. Marian Nehrebecki, 2022. "Balance Sheet Theory During COVID-19: The Relationship Between Cash Flow and Investment in Polish Listed Companies," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 4, pages 74-88.
    7. Lee, Chien-Chiang & Wang, Chih-Wei & Thinh, Bui Tien, 2023. "Green development, climate risks, and cash flow: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    8. Moncef Guizani & Ahdi Noomen Ajmi, 2020. "Financial conditions, financial constraints and investment-cash flow sensitivity: evidence from Saudi Arabia," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 37(4), pages 763-784, September.
    9. Drobetz, Wolfgang & Janzen, Malte & Requejo, Ignacio, 2019. "Capital allocation and ownership concentration in the shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 122(C), pages 78-99.
    10. Annalisa Baldissera, 2022. "The Negotiated Settlement of the Crisis and the Cash Flows of Large Unlisted Italian Companies," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 75-91.
    11. Moncef Guizani, 2021. "Macroeconomic conditions and investment–cash flow sensitivity: Evidence from Saudi Arabia," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4277-4294, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gaurav Gupta & Jitendra Mahakud, 2019. "Alternative measure of financial development and investment-cash flow sensitivity: evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-28, December.
    2. Mulier, Klaas & Schoors, Koen & Merlevede, Bruno, 2016. "Investment-cash flow sensitivity and financial constraints: Evidence from unquoted European SMEs," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 182-197.
    3. Schauer, Catharina & Elsas, Ralf & Breitkopf, Nikolas, 2019. "A new measure of financial constraints applicable to private and public firms," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 270-295.
    4. Alfonsina Iona & Leone Leonida, 2018. "Sample separation and the sensitivity of investment to cash flow: Is the monotonicity condition empirically satisfied?," Working Papers 862, Queen Mary University of London, School of Economics and Finance.
    5. Andrea Mercatanti & Taneli Mäkinen & Andrea Silvestrini, 2017. "Investment decisions by European firms and financing constraints," Temi di discussione (Economic working papers) 1148, Bank of Italy, Economic Research and International Relations Area.
    6. Théo Nicolas, 2022. "Short-term financial constraints and SMEs’ investment decision: evidence from the working capital channel," Small Business Economics, Springer, vol. 58(4), pages 1885-1914, April.
    7. Moshirian, Fariborz & Nanda, Vikram & Vadilyev, Alexander & Zhang, Bohui, 2017. "What drives investment–cash flow sensitivity around the World? An asset tangibility Perspective," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 1-17.
    8. Ilker Yilmaz, 2022. "Leverage and Investment Cash Flow Sensitivity: Evidence from Muscat Securities Market in Oman," SAGE Open, , vol. 12(3), pages 21582440221, August.
    9. Andrén, Niclas & Jankensgård, Håkan, 2015. "Wall of cash: The investment-cash flow sensitivity when capital becomes abundant," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 204-213.
    10. Dongyang Zhang, 2017. "Is working capital management value-enhancing through alleviating financial constraints? Evidence from Chinese non-listed firms," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 15(4), pages 373-406, October.
    11. Milos Markovic & Michael A. Stemmer, 2017. "Firm Growth Dynamics and Financial Constraints: Evidence from Serbian Firms," Documents de travail du Centre d'Economie de la Sorbonne 17012, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    12. Sprenger, Carsten & Lazareva, Olga, 2022. "Corporate governance and investment-cash flow sensitivity: Evidence from Russian unlisted firms," Journal of Comparative Economics, Elsevier, vol. 50(1), pages 71-100.
    13. Aydin Ozkan & Roberto J. Santillán‐Salgado & Yilmaz Yildiz & María del Rocío Vega Zavala, 2020. "What Happened To The Willingness Of Companies To Invest After The Financial Crisis? Evidence From Latin American Countries," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(2), pages 231-262, May.
    14. Moncef Guizani, 2021. "Macroeconomic conditions and investment–cash flow sensitivity: Evidence from Saudi Arabia," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4277-4294, July.
    15. Bhagat, Sanjai & Moyen, Nathalie & Suh, Inchul, 2005. "Investment and internal funds of distressed firms," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 449-472, June.
    16. Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan, 2016. "Cash flow sensitivities during normal and crisis times: Evidence from shipping," Transportation Research Part A: Policy and Practice, Elsevier, vol. 90(C), pages 26-49.
    17. Abdul Rashid & Noshaba Jabeen, 2018. "Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-20, December.
    18. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    19. Gül, Selçuk & Taştan, Hüseyin, 2020. "The impact of monetary policy stance, financial conditions, and the GFC on investment-cash flow sensitivity," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 692-707.
    20. Firth, Michael & Malatesta, Paul H. & Xin, Qingquan & Xu, Liping, 2012. "Corporate investment, government control, and financing channels: Evidence from China's Listed Companies," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 433-450.

    More about this item

    Keywords

    Cash flow sensitivity; Financial constraints; Liquidity crises; Investment spending; Supply side shock;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:66:y:2017:i:c:p:225-239. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620167 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.