How firms manage their cash flows: an examination of diversification’s effect

Thang Nguyen (), Charlie X. Cai () and Patrick McColgan ()
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Thang Nguyen: University of Portsmouth
Charlie X. Cai: University of Leeds
Patrick McColgan: University of Strathclyde

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 3, No 5, 724 pages

Abstract: Abstract We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.

Keywords: Diversification; Liquidity; Free cash flow; Financing cash flow; Financial management (search for similar items in EconPapers)
JEL-codes: D92 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11156-016-0565-1

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