The marginal value of cash, cash flow sensitivities, and bank-finance shocks in nonlisted firms

Sørensen, Bent E, Charlotte Ostergaard and Amir Sasson
Authors registered in the RePEc Author Service: Bent E. Sorensen

No 8278, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how nonlisted 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 firms' trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flow. Our analysis suggests that shocks to external financing costs are transmitted to the real economy via firms' marginal value of cash.

Keywords: Bank lending channel; Cash flow trade-offs; Cash holdings; External financing costs; Nonlisted firms (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2011-02
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Citations: View citations in EconPapers (4)

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