Cash flow sensitivities and bank-finance shocks in non-listed firms

Abstract

We study how small firms manage cash flows by estimating cash flow sensitivities for all sources and uses of cash. Our data are Norwegian non-listed firms which can be matched to the banks they borrow from. Firms with low cash holdings mainly use external finance to offset cash flow fluctuations over the cycle, whereas firms with high cash holdings rely mainly on internal finance. Estimating how cash flow sensitivities change with exogenous bank shocks, we find that the cyclicality of cash-poor firms' investment is amplified because they do not substitute internal for external finance. Our results imply that for small firms, the transmission of financial shocks to the real economy is closely tied to their accumulation of cash.

Financing Moderation in the Relationship of Investing Activities and the Bank Capital Adequacy Ratio

“…According to Ostergaard et al (2010), an internal source placement of banks' funds for current investments will automatically reduce future liquidity and investment capability. An entity might buy such assets for investment in the form of fixed assets or inventory investments.…”