The impact of liquidity crises on cash flow sensitivities

Wolfgang Drobetz, Rebekka Haller, Iwan Meier and Vefa Tarhan

The Quarterly Review of Economics and Finance, 2017, vol. 66, issue C, 225-239

Abstract: We examine the relationship between liquidity crises and frictions in raising funds, and find that both the gap between the cash flow sensitivities of financially healthy and weak firms and the cash flow sensitivities of healthy and weak firms themselves are positively correlated with the severity of liquidity crises. Using a multi-equation model of cash flow sensitivities, we find that moderate liquidity crises mostly affect firms’ financing activities. The recent financial crisis was especially severe for financially weak firms and curtailed both their investment and financing decisions. Financially healthy firms were able to protect their investments by maintaining financial flexibility.

Keywords: Cash flow sensitivity; Financial constraints; Liquidity crises; Investment spending; Supply side shock (search for similar items in EconPapers)
JEL-codes: G01 G31 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:66:y:2017:i:c:p:225-239

DOI: 10.1016/j.qref.2017.03.004

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