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Review of Financial Studies Vol. 35 No. 8 2022

Understanding Cash Flow Risk

Sebastian Gryglewicz1; Loriano Mancini2; Erwan Morellec3; Enrique Schroth4; Philip Valta5

1 Erasmus University Rotterdam · 2 USI Lugano and Swiss Finance Institute · 3 EPF Lausanne, Swiss Finance Institute, and CEPR · 4 EDHEC Business School and CEPR · 5 University of Bern

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Abstract

Theory has recently shown that corporate policies should depend on firms’ exposure to short- and long-lived cash flow shocks and the correlation between these shocks. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions of a canonical cash flow model. As predicted by theory, we find that the estimated parameters are strongly related to corporate liquidity and financing choices, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines the cash flow sensitivity of cash.

DOI
10.1093/rfs/hhab127
Volume
35
Issue
8
Pages
3922-3972
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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