Financial constraints on credit ratings and cash-flow sensitivity |
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| Institution: | 1. Department of Finance, Asia University, Taichung, Taiwan;2. Department of International Business, National Taiwan University, Taipei, Taiwan;3. Department of Economics, National Dong Hwa University, Hualien, Taiwan;1. School of Public Administration, Nanjing university of Finance and Economics, China;2. Department of History of Science, Technology and Medicine, Peking University, China;1. Department of Economics and Finance, SHU-UTS SILC Business School, Shanghai University, Shanghai 201800, China;2. Department of Finance, Goodman School of Business, Brock University, Ontario, Canada;3. Department of Economics and Finance, College of Business Administration, University of Texas-El Paso, El Paso, TX 79968, USA;1. School of Economics, Jiaxing University, Jiaxing 314001, China;2. China-ASEAN Institute of Financcial Cooperation, Guangxi University, Nanning, Guangxi, China;3. School of Economics, Guangxi University, Nanning, Guangxi, China;5. Shenzhen International Graduate School, Tsinghua University, Shenzhen, Guangdong, China;6. Guangxi University of Finance and Economics, Graduate School, Nanning, Guangxi, China;1. Leeds University Business School, United Kingdom;2. Cardiff Business School, United Kingdom |
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| Abstract: | 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. |
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