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Understanding Cash Flow Risk

Author

Listed:
  • Sebastian Gryglewicz
  • Loriano Mancini
  • Erwan Morellec
  • Enrique Schroth
  • Philip Valta

Abstract

Theory has recently shown that corporate policies should depend on firms’ exposure to short- and long-lived cash flow shocks and the correlation between these shocks. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions of a canonical cash flow model. As predicted by theory, we find that the estimated parameters are strongly related to corporate liquidity and financing choices, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines the cash flow sensitivity of cash.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Sebastian Gryglewicz & Loriano Mancini & Erwan Morellec & Enrique Schroth & Philip Valta, 2022. "Understanding Cash Flow Risk," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3922-3973.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:8:p:3922-3973.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab127
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    More about this item

    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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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