Financial Flexibility and Corporate Cash Policy
57 Pages Posted: 27 Jul 2013 Last revised: 31 Oct 2013
Date Written: October 2013
Using variations in local real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on cash policies of US firms. Building on this natural experiment, we find strong evidence that increases in real estate values lead to smaller corporate cash reserves, declines in the marginal value of cash holdings, and lower cash flow sensitivities of cash. The representative US firm holds $0.037 less of cash for each $1 of collateral, quantifying the sensitivity of cash holdings to collateral value. We further find that the decrease in cash holdings is more pronounced in firms with greater investment opportunities, financial constraints, better corporate governance, and lower local real estate price volatility.
Keywords: Cash policy, Debt capacity, Collateral, Real estate value, Cash holding, Marginal value of cash, Cash flow sensitivity of cash
JEL Classification: G32, G31, G34, R30
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