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How firms manage their cash flows: an examination of diversification’s effect

Author

Listed:
  • Thang Nguyen

    (University of Portsmouth)

  • Charlie X. Cai

    (University of Leeds)

  • Patrick McColgan

    (University of Strathclyde)

Abstract

We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.

Suggested Citation

  • Thang Nguyen & Charlie X. Cai & Patrick McColgan, 2017. "How firms manage their cash flows: an examination of diversification’s effect," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 701-724, April.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:3:d:10.1007_s11156-016-0565-1
    DOI: 10.1007/s11156-016-0565-1
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    References listed on IDEAS

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    Cited by:

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    2. Edyta Mioduchowska-Jaroszewicz, 2021. "An Analysis of External Cash Flows of Capital Groups," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 1), pages 325-340.
    3. Mohammad Ali AL Hayek, 2018. "The Relationship Between Sales Revenue and Net Profit with Net Cash Flows from Operating Activities in Jordanian Industrial Joint Stock Companies," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(3), pages 149-162, July.

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    More about this item

    Keywords

    Diversification; Liquidity; Free cash flow; Financing cash flow; Financial management;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • 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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