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Real and financial tradeoffs in non-listed firms: Cash flow sensitivities and how they change with shocks to firms' main-bank

Author

Listed:
  • Charlotte Østergaard

    (Norwegian School of Management and Norges Bank (Central Bank of Norway))

  • Amir Sasson

    (Norwegian School of Management)

  • Bent E. Sørensen

    (University of Houston and the CEPR)

Abstract

We study how non-listed firms trade off financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect corporate trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flows. Our analysis suggests that external finance constraints affect the real economy via firms' marginal value of cash.

Suggested Citation

  • Charlotte Østergaard & Amir Sasson & Bent E. Sørensen, 2010. "Real and financial tradeoffs in non-listed firms: Cash flow sensitivities and how they change with shocks to firms' main-bank," Working Paper 2010/27, Norges Bank.
    • Handle: RePEc:bno:worpap:2010_27
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    References listed on IDEAS

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    Keywords

    Cash Management; Cash Holdings; Cost of External Finance; Non_listed Firms; Bank Lending Channel;
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