Defining Current and Expected Financial Constraints Using AI: Reinterpreting the Cash Flow Sensitivity of Cash

Rachel Cho, Christoph Görtz, Danny McGowan and Max Schröder

No 12054, CESifo Working Paper Series from CESifo

Abstract: We propose a new approach to identify firm-level financial constraints by applying artificial intelligence to text of 10-K filings by U.S. public firms from 1993 to 2021. Leveraging transformer-based natural language processing, our model captures contextual and semantic nuances often missed by traditional text classification techniques, enabling more accurate detection of financial constraints. A key contribution is to differentiate between constraints that affect firms presently and those anticipated in the future. These two types of constraints are associated with distinctly different financial profiles: while firms expecting future constraints tend to accumulate cash preemptively, currently constrained firms exhibit reduced liquidity and higher leverage. We show that only firms anticipating financial constraints exhibit significant cash flow sensitivity of cash, whereas currently constrained and unconstrained firms do not. This calls for a narrower interpretation of this widely used cash-based constraints measure, as it may conflate distinct firm types – unconstrained and currently constrained – and fail to capture all financially constrained firms. Our findings underscore the critical role of constraint timing in shaping corporate financial behavior.

Keywords: financial constraints; artificial intelligence; expectations; cash; cash flow; corporate finance behavior (search for similar items in EconPapers)
JEL-codes: D92 G31 G32 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-ain and nep-sbm
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