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Financing constraints and firms’ cash policy in the euro area

  • Pál, Rozália
  • Ferrando, Annalisa

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. Contrary to previous evidence based mainly on US firms, 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 the 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. JEL Classification: D92, G3, G32

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Paper provided by European Central Bank in its series Working Paper Series with number 0642.

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Date of creation: Jun 2006
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Handle: RePEc:ecb:ecbwps:20060642
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  1. Fabio Schiantarelli, 1995. "Financial Constraints and Investment: A Critical Review of Methodological Issues and International Evidence," Boston College Working Papers in Economics 293., Boston College Department of Economics.
  2. Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
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  4. von Kalckreuth, Ulf & Hernando, Ignacio & Generale, Andrea & Chatelain, Jean Bernard & Vermeulen, Philip, 2001. "Firm Investment and Monetary Policy Transmission in the Euro Area," Discussion Paper Series 1: Economic Studies 2001,20, Deutsche Bundesbank, Research Centre.
  5. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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  8. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
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  12. Chatelain, Jean-Bernard & Generale, Andrea & Hernando, Ignacio & Von Kalckreuth, Ulf & Vermeulen, Philip, 2001. "Firm investment and monetary transmission in the euro area," Working Paper Series 0112, European Central Bank.
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  14. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
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  17. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  18. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  19. 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.
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  22. Aydogan Alti, 2003. "How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?," Journal of Finance, American Finance Association, vol. 58(2), pages 707-722, 04.
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