How Do Misvalued Firms Deploy Internal Cash Flow?

Xin Chang, Wing Chun Kwok, Tao Li, George Wong and Jiaquan Yao

Journal of Business Finance & Accounting, 2026, vol. 53, issue 2, 921-944

Abstract: We examine how firms deploy internal cash flow across primary uses when they are misvalued in capital markets. Our integrated regression framework depicts a complete picture of what firms do with cash flow by jointly estimating the cash flow sensitivities of various uses. The results show that, given an additional dollar of cash flow, overvalued firms allocate more to reduce external financing and less to investment and cash savings. Collectively, our findings illustrate how firms tune cash flow allocation to absorb the valuation shocks, revealing an internal financing channel through which misvaluation impacts corporate decisions and the real economy.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:53:y:2026:i:2:p:921-944

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