Financial Flexibility and Corporate Cash PolicyAbstract: Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on firms¡¯ cash policies. We find strong evidence that increases in debt capacity lead to smaller corporate cash reserves and declines in the marginal value of cash holdings. We further find that the decrease in cash holdings is more pronounced in firms with higher hedging needs, greater investment opportunities, financial constraints, better corporate governance and lower local real estate price volatility

Chen, Tao; Harford, Jarrad; Lin, Chen

Financial Flexibility and Corporate Cash PolicyAbstract: Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on firms¡¯ cash policies. We find strong evidence that increases in debt capacity lead to smaller corporate cash reserves and declines in the marginal value of cash holdings. We further find that the decrease in cash holdings is more pronounced in firms with higher hedging needs, greater investment opportunities, financial constraints, better corporate governance and lower local real estate price volatility

Tao Chen, Jarrad Harford () and Chen Lin

No 52017, Working Papers from Hong Kong Institute for Monetary Research

Keywords: Financial Flexibility; Collateral Value; Cash Policy; Real Estate Prices (search for similar items in EconPapers)
JEL-codes: G31 G32 R30 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-03
New Economics Papers: this item is included in nep-cfn
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