Original scientific paper
https://doi.org/10.1080/1331677X.2020.1862687
The nonmonotonicity of cash-cash flow relationship: the role of uncertainty and financing constraints
Dmytro Osiichuk
Paweł Mielcarz
Abstract
Relying on panel firm-level data from an emerging economy, the
paper postulates and empirically verifies the pattern of a Ushaped relationship between cash flows and cash holdings. The
positive cash-cash flow sensitivity is postulated to be driven by
precautionary motive, which is engendered by excessive volatility
of cash flows. Therefore, cash accumulation appears to serve the
primary purpose of mitigating the problem of unpredictability of
cash flows. While revealing no significant cash-cash flow relationship for the majority of firms, the analysis of firm-level cash-cash
flow sensitivity coefficients shows that the companies with the
lowest and the highest cash flows maintain disproportionately
higher cash reserves than their counterparts with intermediate
cash flows. The firms exhibiting negative cash-cash flow relationship are found to be of younger age, smaller size, lower liquidity,
and asset tangibility than the remainder of the research sample.
These firms are evidenced to accumulate cash reserves from
equity issuances, while their overall capacity to procure external
financing remains impaired. Their financing patterns are reminiscent of the agency problem of ‘gambling for resurrection’. In turn,
the firms exhibiting positive cash-cash flow sensitivity are documented to maintain cash reserves in order to be able to alleviate
cash flow volatility.
Keywords
cash flow sensitivity of cash; asymmetry of information; cash management; emerging economy
Hrčak ID:
301356
URI
Publication date:
31.12.2021.
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