Financial Flexibility and Corporate Cash Policy
HKIMR Working Paper No. 05/2017
57 Pages Posted: 22 Mar 2017
Date Written: March 21, 2017
Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on firms’ cash policies. We find strong evidence that increases in debt capacity lead to smaller corporate cash reserves and declines in the marginal value of cash holdings. We further find that the decrease in cash holdings is more pronounced in firms with higher hedging needs, greater investment opportunities, financial constraints, better corporate governance and lower local real estate price volatility.
Keywords: Financial Flexibility, Collateral Value, Cash Policy, Real Estate Prices
JEL Classification: G32, G31, R30
Suggested Citation: Suggested Citation