Financial constraints on credit ratings and cash-flow sensitivity

Chih-Chung Chien, Shikuan Chen and Ming-Jen Chang

International Review of Financial Analysis, 2023, vol. 88, issue C

Abstract: This study investigates whether financial constraints, as measured by the level of credit ratings and their migrations would affect the firm's cash flow allocation policies and reflect the main financial constraints on a firm's cash flow sensitivity of cash. For a given credit quality shock, control for firm-level characteristics and endogeneity of cash flow allocation, our results suggest that firms with higher credit financial constraints have significantly higher cash flow sensitivities on cash holding, investment, and debt financing activities. Our results provide evidence that credit rating risk has a larger impact on cash flow allocation and drives the financial constraints on cash flow sensitivity for various reasons, including precautionary motivation and restricted access to external financing.

Keywords: Cash-flow sensitivities; Credit ratings; Endogeneity; Financial constraints (search for similar items in EconPapers)
JEL-codes: E22 G31 G32 L32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:88:y:2023:i:c:s1057521923001461

DOI: 10.1016/j.irfa.2023.102630

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