Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom

Some projects take time to build or are slow to yield cash flows. This may impact the dynamics of investment and liquidity management, although few studies test their financial implications. We exploit the peculiar advantages of copper mines as a laboratory to identify cash-flow sensitivities. In this context, investment decisions depend on the expectations of the long run price of the commodity, while the spread between the spot price and this long run expectations shifts current cash-flows. For this study we compiled a sample of copper firms between 2002 and 2012. We do not find significant effects of cash flow on current capital expenditures, but we do observe a systematic cash flow sensitivity of cash holdings, meaning that some of these transitory earnings are retained as liquidity. This cash stockpiling is stronger among financially constrained firms. In a context of time-to-build, our findings support financial theories emphasizing the salience of cash as buffer stock for liquidity in preparation for future investment opportunities.     

Corporate investment,government control,and financing channels: Evidence from China's Listed Companies

We investigate the relation between the internally generated cash flows and fixed asset investments of Chinese firms and find that it is U-shaped. Cash flow and investment are negatively related for low levels of cash flow but positively related for high levels of cash flow. We find that government controlled listed firms have greater investment–cash flow sensitivities than do privately controlled listed companies, especially on the left-hand side of the U-shaped curve where cash flow is negative. However, the difference in sensitivities appears only among firms that possess few profitable investment opportunities. We attribute this finding to the government having multiple socio-economic objectives, which leads to increased capital expenditures by the firms it controls when internal funds are abundant and when internal funds are negative. There is no evidence that access to finance and soft budget constraints explain the differences between the investment–cash flow sensitivities of government controlled and privately controlled listed firms.     

The Effects of Liquidity Shocks on Corporate Investments and Cash Holdings: Evidence from Actuarial Pension Gains/Losses

This paper investigates how anticipated liquidity shocks affect corporate investment and cash holdings by examining the impacts of actuarial pension gains/losses that do not reduce current internal resources but will reduce those available in the future. Using a sample from Japanese manufacturing firms in which pension deficits had a huge impact on the internal resources of sponsoring firms, I show that pension losses significantly decrease the capital expenditures of sponsoring firms. Pension losses also increase corporate cash holdings, suggesting precautionary demands for cash prepared for future pension contributions. Overall, the results indicate that managers consider anticipated liquidity shocks in determining current investment and cash‐saving policies.     

The Business Cycle,Investor Sentiment,and Costly External Finance

The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time‐varies and, if so, what are the real effects. Consistent with time‐varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.     

Financial constraints on credit ratings and cash-flow sensitivity

This study investigates whether financial constraints, as measured by the level of credit ratings and their migrations would affect the firm's cash flow allocation policies and reflect the main financial constraints on a firm's cash flow sensitivity of cash. For a given credit quality shock, control for firm-level characteristics and endogeneity of cash flow allocation, our results suggest that firms with higher credit financial constraints have significantly higher cash flow sensitivities on cash holding, investment, and debt financing activities. Our results provide evidence that credit rating risk has a larger impact on cash flow allocation and drives the financial constraints on cash flow sensitivity for various reasons, including precautionary motivation and restricted access to external financing.     

The Effect of Venture Capital Financing on the Sensitivity to Cash Flow of Firm's Investments

This work studies the effect of venture capital (VC) financing on firms' investments in a longitudinal sample of 379 Italian unlisted new‐technology‐based firms (NTBFs) observed over the 10‐year period from 1994 to 2003. We distinguish the effects of VC financing according to the type of investor: independent VC (IVC) funds and corporate VC (CVC) investors. Previous studies argue that NTBFs are the firms most likely to be financially constrained. The technology‐intensive nature of their activity and their lack of a track record increase adverse selection and moral hazard problems. Moreover, most of their assets are firm‐specific or intangible and hence cannot be pledged as collateral. In accordance with this view, we show that the investment rate of NTBFs is strongly positively correlated with their current cash flows. We also find that after receiving VC financing, NTBFs increase their investment rate independently of the type of VC investor. However, the investments of CVC‐backed firms remain sensitive to shocks in cash flows, whereas IVC‐backed firms exhibit a low and statistically not significant investment–cash flow sensitivity that we interpret as a signal of the removal of financial constraints.     

中国实业部门金融化的异质性

本文基于实业和金融两类投资组合模型的构建,重点考察不同所有权性质和不同行业企业的金融化驱动机制是否具有异质性,并探究不同类别金融投资对应结果的差异性特征。实证结果与已有研究以及传统印象并不一致:我们发现,风险规避是中国非国有企业和制造业企业金融化的显著驱动因素,而国有企业和非制造业企业则不存在这一特征;同时,非制造业企业的金融投资主要由收益率差驱动,而在其他企业样本中均没有证据显示追逐利润是企业金融化的推动因素。不同企业样本的融资约束、杠杆率、成长性、流动性水平以及资产质量等因素对企业金融资产占比的影响也存在显著差异。进一步区分企业金融投资中货币和非货币类金融资产的不同特性并考虑企业的长期股权投资,结果表明货币类金融资产和非货币类金融资产的驱动机制存在明显差异:对于货币类金融资产投资,国有企业主要受资本逐利因素推动,其他企业则未体现这一特征;对于非货币类金融资产投资,非国有企业、制造业和非制造业企业均受到风险因素驱动,而国有企业则不受影响;将企业长期股权投资纳入金融资产后结果则未产生明显差异。     

The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs

This paper investigates the determinants of leveraged buyout (LBO) activity by comparing firms that have implemented LBOs to those that have not. Consistent with the free cash flow theory, we find that firms that initiate LBOs can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. LBO firms also tend to be more diversified than firms which do not undertake LBOs. In addition, firms with high expected costs of financial distress (e.g., those with high research and development expenditures) are less likely to do LBOs.     

The Corporate Propensity to Save

Why do corporations accumulate liquid assets? We show theoretically that intertemporal trade‐offs between interest income taxation and the cost of external finance determine optimal savings. Intriguingly, we find that, controlling for Tobin's q, saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash‐flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many forces to be used to measure external finance constraints.     

CEO inside debt and investment‐cash flow sensitivity

This paper provides a new explanation for investment‐cash flow sensitivity from the perspective of CEO inside debt holdings. We examine the effect of CEO pensions and deferred compensation (inside debt) on investment‐cash flow sensitivity for a sample of U.S. manufacturing firms from 2006 to 2012. We find that the firms with higher relative CEO leverage ratios (CEO's debt/equity ratio scaled by the firm's debt/equity ratio) generate higher investment‐cash flow sensitivity. Moreover, one standard deviation increase in the logarithm of the relative CEO leverage ratio enlarges investment‐cash flow sensitivity by 50 per cent. This positive relationship still holds even after we take account of endogeneity and financial constraints.     

Why Does the Law Matter? Investor Protection and Its Effects on Investment,Finance, and Growth

Investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection, external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q and cash flow sensitivities are associated with ex post investment efficiency; investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities. The paper's findings are broadly consistent with investor protection promoting accurate share prices, reducing financial constraints, and encouraging efficient investment.     

Investment and financing decisions of private and public firms

We examine differences in the allocation of cash flow between Western European private and public firms. Public firms have a higher investment‐cash flow sensitivity than comparable private firms. This difference is not attributable to more severe financing constraints of public firms. Instead, because differences in investment‐cash flow sensitivities are only observed for the unexpected portion of firms’ cash flow, the empirical evidence supports an agency‐based explanation. Similar patterns are observable for the expected and unexpected portion of firms’ shareholder distributions. Our results are driven by firms from countries with low ownership concentration and more liquid stock markets, where shareholders have lower incentives to monitor. The results are also more pronounced for public firms with low industry Tobin's q and high free cash flow, which are more prone to suffer from agency problems.     

Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium

We propose a dynamic risk‐based model that captures the value premium. Firms are modeled as long‐lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM.     

Two Different Ways of Treating Corporate Cash in FCF Valuations—and the Importance of Getting the Cost of Capital Right

The methods for calculating free cash flow presented in texts on financial statement analysis and valuation appear to be very different from those in corporate finance texts, causing some confusion among academics as well as practitioners. Financial statement analysis and valuation texts generally begin by valuing just the enterprise operations—that is, the entity that engages in the firm's primary revenue‐generating activities—and then adding back the value of its cash holdings and other financial assets. The corporate finance approach is typically to value all the assets together, including financial assets that are not used in the production of the goods and services provided by the firm. Using a simple example, the authors show that the valuation of the equity ownership of the firm should be the same for both methods of calculating free cash flow, provided the analyst makes the appropriate adjustments to the method for calculating the cost of capital (WACC) used to discount forecasted free cash flows to a present value.     

货币政策冲击对实体企业投资选择影响的“宿醉效应”

本文研究货币政策冲击对实体企业投资选择的动态影响效应。与传统分析方法不同,本文运用利率衍生品价格数据来识别中国货币政策冲击,利用工具变量局部投影法获得货币政策冲击对微观实体企业投资选择的动态影响效应。研究表明,动态效应呈现出更丰富的信息:货币政策冲击对企业金融资产占比有显著驱动效应,效应大小表现出先升后降趋势,在冲击发生一年半后达到峰值。值得注意的是,货币政策冲击会导致企业货币资金占比在短期内显著减少,而在中长期显著增加。进一步分析表明,货币政策冲击使实业投资和金融投资在短期内都更有利可图,所以在短期内企业倾向于减少货币资金占比,增加非货币金融资产投资和实业投资;政策冲击在中长期对企业资产收益率的提升作用消退,盈余效应使企业在中长期的金融资产占比提高,表现出一定的“宿醉效应”。     

Intangible Assets and Corporate Signaling

Research and development (R&D) and advertising expenditures often result in patents, technologies and brand names which are difficult to accurately value. Under current generally accepted accounting principles (GAAP) these intangible assets are generally not recognized in the financial statements, but instead are expensed in the period that they occur. Prior studies note that the market-to-book ratios of firms with significant levels of R&D and advertising expenditures suggest that investors, at least partially, value these assets. Researchers and practitioners argue that current GAAP, by not recognizing these intangible assets, reduces the usefulness and relevance of accounting reports.We investigate whether companies with significant levels of intangible assets are more likely to emphasize dividend increases and stock repurchases (which are generally perceived as signaling favorable investment opportunities), instead of traditional accounting disclosures, as a means of overcoming adverse selection. Because these assets are difficult to measure, cash distributions may be viewed as a more credible means of signaling firm value to investors. Using analysts' ratings of firms' accounting disclosures, we find that companies with higher levels of R&D and advertising expenditures are less likely to provide extensive accounting disclosures and instead tend to employ dividend and stock repurchase signals. We obtain these results even after controlling for other firm attributes, such as size, stock returns performance, leverage, liquidity and investors' expectations of growth opportunities. We also find that the market reaction to dividend increase and stock repurchase announcements is greater for firms with higher levels of R&D and advertising expenditures, indicating that these announcements are more informative for such firms.     

Why do firms save cash from cash flows? Evidence from firm‐level estimation of cash–cash flow sensitivities

We construct firm‐level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced‐form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.     

What Moves Investment Growth?

We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash‐flow growth and stock returns, and revisions of expectations about future cash‐flow growth and future discount rates. Using a vector autoregressive model we find that current cash‐flow surprises account for the largest element of the variance decomposition. Investment growth and current cash‐flow surprises are negatively correlated with news about future cash‐flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs.     

The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities

We develop a dynamic multiequation model where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash. We argue that static models of financial decisions produce inconsistent coefficient estimates, and that models that do not acknowledge the interdependence among decision variables produce inefficient estimates and provide an incomplete and potentially misleading view of financial behavior. We use our model to examine whether firms are constrained from accessing capital markets. Unlike static single‐equation studies that find firms underinvest given cash flow shortfalls, we conclude that firms maintain investment by borrowing.     

Collateral and capital structure

We develop a dynamic model of investment, capital structure, leasing, and risk management based on firms' need to collateralize promises to pay with tangible assets. Both financing and risk management involve promises to pay subject to collateral constraints. Leasing is strongly collateralized costly financing and permits greater leverage. More constrained firms hedge less and lease more, both cross-sectionally and dynamically. Mature firms suffering adverse cash flow shocks may cut risk management and sell and lease back assets. Persistence of productivity reduces the benefits to hedging low cash flows and can lead firms not to hedge at all.