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Financing constraints and firms' cash policy in the euro area

Author

Listed:
  • Rozalia Pal
  • Annalisa Ferrando

Abstract

This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classification based on micro-data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing conditions, the internal cash flow is used in a systematic pattern for inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms.

Suggested Citation

  • Rozalia Pal & Annalisa Ferrando, 2010. "Financing constraints and firms' cash policy in the euro area," The European Journal of Finance, Taylor & Francis Journals, vol. 16(2), pages 153-171.
  • Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:153-171
    DOI: 10.1080/13518470903075748
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    Citations

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    Cited by:

    1. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    2. Filipe Silva & Carlos Carreira, 2012. "Do financial constraints threat the innovation process? Evidence from Portuguese firms," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 21(8), pages 701-736, November.
    3. Gebauer, Stefan & Setzer, Ralph & Westphal, Andreas, 2017. "Corporate debt and investment: a firm level analysis for stressed euro area countries," Working Paper Series 2101, European Central Bank.
    4. repec:bec:imsber:v:9:y:2017:i:3:p:71-103 is not listed on IDEAS
    5. Filipe Silva & Carlos Carreira, 2016. "The Role of Financial Constraints in the Services Sector: How Different is it from Manufacturing?," Notas Econ├│micas, Faculty of Economics, University of Coimbra, issue 43, pages 21-41, June.
    6. Carlos Carreira & Filipe Silva, 2013. "Do Size, Age and Dividend Policy Provide Useful Measures of Financing Constraints? New Evidence from a Panel of Portuguese Firms," GEMF Working Papers 2013-26, GEMF, Faculty of Economics, University of Coimbra.
    7. Carlos Carreira & Filipe Silva, 2012. "Where Are The Fragilities? The Relationship Between Firms' Financial Constraints, Size, And Age," Book Chapters, Institute of Economic Sciences.

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