Financial constraints and cash–cash flow sensitivity

Abstract

This article explores the cash–cash flow relationship by comparing financially constrained and financially unconstrained companies. Unlike previous research, we test the sensitivity of cash to cash flow by considering unlisted firms as constrained and listed firms as unconstrained. Our empirical evidence is based on findings from Spanish firms and is consistent with the core rationale that unlisted firms face more difficulties than their listed counterparts when looking for funding from external markets. As a result, unlisted firms tend to hoard significant amounts of cash out of the generated cash flow, while listed firms do not. Our findings are robust to a number of additional empirical tests.

Keywords:

• cash
• constrained firms
• unconstrained firms
• cash flow
• liquidity policy

JEL Classification:

• G32
• C33

Acknowledgement

The authors are grateful to Mark Taylor (the editor) and anonymous referees for comments and to Valentín Azofra, Félix López-Iturriaga, Juan Antonio Rodríguez-Sanz and Eleuterio Vallelado for their valuable comments and suggestions on earlier versions of this paper.

Notes

¹ The list is long. Notable papers include those of Dittmar et al. (2003); Faulkender and Wang (2006); Harford (1999); Harford et al. (2008); Kim et al. (1998); Martínez-Sola et al. (2013); Mikkelson and Partch (2003); Opler et al. (1999); Ozkan and Ozkan (2004); Pinkowitz and Williamson (2001); Uyar and Kuzey (2014).

² Pál and Ferrando (2010) extend the analysis in Almeida et al. (2004) to euro area firms. Surprisingly, their results are not in line with those found by Almeida et al. (2004) for US firms. Specifically, they find that unconstrained firms show the highest sensitivity of cash holdings to cash flow. They offer the explanation of high growth opportunities as the cause of this puzzling result.

³ In Spain, a company is obliged to issue consolidated statements when it exceeds two of the following three thresholds: (i) total assets in excess of €11.4 million, (ii) turnover in excess of €22.8 million and (iii) more than 250 workers.

⁴ The estimation via GMM is performed by the user-written Stata command ‘xtivreg2’ (Schaffer, 2010). Previously, we have tested the endogeneity problem using Hausman’s (1978) test (results not reported), which confirmed that NET_WC, CAPEX, LEVERAGE and DEBT_MATURITY variables should be considered as endogenous.