Extending the results of Riddick and Whited (2009), we show that firms systematically dissave from liquid assets in response to negative cash flow. This dissaving behavior is consistent with firms’ rational willingness to absorb negative productivity shocks and retain assets that could become productive in the future. Dissaving behavior significantly varies with the levels of financial constraints, cash reserves, cash flow uncertainty and losses. Our evidence is obtained within the integrated regression framework, in which the cash flow identity holds implicitly, and using both OLS and q measurement-error consistent estimators. Because a large and growing fraction of U.S. firms yield negative cash flow, the corporate propensity to dissave is a systematic phenomenon.
The Corporate Propensity to Dissave Available to Purchase
We would like to thank Ivo Welch (the Editor) and anonymous referee for their detailed and helpful suggestions on improving the paper. We have benefited from discussions with Eduardo Schwartz, Ron Giammarino, Utpal Bhattacharya, Stephan Siegel, and Kai Li; seminar participants at the University of British Columbia, Simon Fraser University, and Queensland University of Technology; and conference participants at the 2019 Financial Markets and Corporate Governance Conference, 2019 International Conference of the Financial Engineering and Banking Society, 2019 Sydney Banking and Financial Stability Conference, 2017 Australian National University Summer Research Camp, 2016 Financial Management Association Asia Pacific Conference, and the 2014 Northern Finance Association Annual Meeting. All errors are ours. This paper is the conclusive chapter of Alexander A. Vadilyev’s Ph.D. thesis.
Nanda VK, Vadilyev AA (2024), "The Corporate Propensity to Dissave". Critical Finance Review, Vol. 13 No. 3-4 pp. 367–418, doi: https://doi.org/10.1561/104.00000148
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