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Financing constraints and firms' cash policy in the euro area

Author

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  • Ferrando, Annalisa
  • Pál, Rozália

Abstract

This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classification based on micro data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Contrary to previous evidence based mainly on US firms, our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing conditions, the internal cash flow is used in a systematic pattern for the inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms. JEL Classification: D92, G3, G32

Suggested Citation

  • Ferrando, Annalisa & Pál, Rozália, 2006. "Financing constraints and firms' cash policy in the euro area," Working Paper Series 642, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2006642
    Note: 235236
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    References listed on IDEAS

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    Cited by:

    1. Massimo Molinari & Silvia Giannangeli & Giorgio Fagiolo, 2016. "Financial Structure and Corporate Growth: Evidence from Italian Panel Data," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(3), pages 303-325, November.
    2. Mertzanis, Charilaos, 2016. "The absorption of financial services in an Islamic environment," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 216-236.
    3. Timo Baas, 2006. "Die Disparität der Sparquoten Ost- und Westdeutschlands: kann der spezifische ostdeutsche Transformationsprozess die Abweichung erklären?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 75(4), pages 121-134.
    4. von Landesberger, Julian & Martinez-Carrascal, Carmen, 2010. "Explaining the money demand of non-financial corporations in the Euro area: A macro and a micro view," Working Paper Series 1257, European Central Bank.
    5. Alessandra Guariglia & John Tsoukalas & Serafeim Tsoukas, 2010. "Investment, irreversibility, and financing constraints in transition economies," Discussion Papers 10/03, University of Nottingham, School of Economics.
    6. Cattaruzzo, Sebastiano & Teruel, Mercedes, 2022. "On the heterogeneity of the long-term leverage-growth relationship: A cross-country analysis of manufacturing firms," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 552-565.
    7. Natalia Nehrebecka & Maria Jarosz, 2012. "Wpływ sytuacji finansowej polskich przedsiębiorstw na inwestycje w kapitał trwały," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 9, pages 15-38.

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    More about this item

    Keywords

    cash policy decisions; financing conditions;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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