Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom |
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| Institution: | 1. School of Economics and Business, University of Chile, Santiago, Chile;2. Center for International Development Harvard. Cambridge, MA, USA;1. Office of Financial Research, U.S. Treasury, 717 14th St NW, Washington, D.C., 20220, United States;2. International Monetary Fund, 700 19th St NW, Washington, D.C., 20431, United States;1. Northeastern University, Boston, MA02186, USA;2. University of California,Riverside, CA92508, USA;3. Securities and Exchange Commission, 44 Montgomery Street, San Francisco, CA94104, USA;1. School of Business, Management and Economics, University of Sussex, Falmer, East Sussex BN1 9QH, UK;2. Department of Finance, School of Business and Economics, Maastricht University, Tongersestraat 53, 6211 LM Maastricht, The Netherlands;3. Finance Department, Vrije Universiteit Amsterdam and Tinbergen Institute, De Boelelaan 1105, NL-1081 HV Amsterdam, The Netherlands |
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| Abstract: | 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. |
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