Cash Savings from Net Equity Issues, Net Debt Issues, and Cash Flows: International Evidence

Abstract

Our study examines cash savings from net equity issues, net debt issues and internally generated cash flows. Previous research has tended to focus on only one savings channel at a time and then report only an aggregate savings rate. We note first that savings rates depend on the level of cash flows. For negative cash flows, savings rates are very low from cash flows and higher from net equity and net debt issues. For higher levels of cash flows, savings rates from cash flows increase substantially while savings rates from net debt issues and net equity issues fall.Using a sample of firms worldwide, we find that constrained firms have higher total savings rates than unconstrained companies which suggest that constrained firms which face costly external finance save more now in order to minimize the chance of not being able to fund valuable investment projects in the future. We also find that savings rates are positively related to investment opportunities, R&D intensity, multinational status, and whether firms are located in countries with a bank-oriented system and negatively related to whether firms pay dividends and whether companies reside in common law countries. The relationships we observe are significant for the subset of firms that are constrained but are usually insignificant for unconstrained firms. Finally, our results suggest that when firms increase their savings, they usually use multiple channels as opposed to relying only on one channel.Overall, our findings support the idea that firms save when they have important investments or activities (for example R&D) in the future that need to be undertaken and save less when they appear to have sufficient resources to cover future contingencies. These results are consistent with a broad precautionary motive for saving. Codes: 240, 230 EFM Classification