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Cash-flow Sensitivities of Interdependent Corporate Decisions – The Role of Financial Constraints and Hedging Needs

Christina Bannier and Carolin Schürg ()
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Carolin Schürg: Justus-Liebig-University, Chair of Banking & Finance, Licher Str. 62, 35394 Giessen, Germany

Credit and Capital Markets, 2018, vol. 51, issue 2, 259-292

Abstract: We examine the cash-flow sensitivities of firms’ simultaneous choice of investment, liquidity, dividends and net debt respectively equity financing in a large sample of US corporates between 1971 and 2016. We differentiate firms according to their (external) financial constraints and their (internal) needs to hedge against future shortfalls in operating income. Our estimation approach shows that financially constrained firms in our sample save more future funding capacity but invest and pay out less out of free cash flows than unconstrained firms. In the financial crisis 2007–2009, all firms invested less out of cash flow and raised their debt repayments, cash holdings and dividend payments. Constrained firms, however, show particularly strong increases in their cash savings but much smaller debt reductions compared to unconstrained firms – both in the crisis and post-crisis period. Internal hedging needs have different effects than external constraints: They weaken the build-up of future debt capacity out of cash flows for all firms, and raise the investment cash-flow sensitivity only for unconstrained firms.

Keywords: Cash-flow sensitivity; investment; debt issuance; cash holdings; dividend payments (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kuk:journl:v:51:y:2018:i:2:p:259-292