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Financial Flexibility and Corporate Cash PolicyAbstract: Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in real estate prices as exogenous shocks to corporate financing capacity, we investigate the causal effects of financial flexibility on firms¡¯ cash policies. We find strong evidence that increases in debt capacity lead to smaller corporate cash reserves and declines in the marginal value of cash holdings. We further find that the decrease in cash holdings is more pronounced in firms with higher hedging needs, greater investment opportunities, financial constraints, better corporate governance and lower local real estate price volatility

Author

Listed:
  • Tao Chen

    (Nanyang Technological University)

  • Jarrad Harford

    (University of Washington)

  • Chen Lin

    (The University of Hong Kong)

Abstract

No abstract is available for this item.

Suggested Citation

  • Tao Chen & Jarrad Harford & Chen Lin, 2017. "Financial Flexibility and Corporate Cash PolicyAbstract: Debt capacity creates financial flexibility and collateral-based debt capacity is the least sensitive to cash flow shocks. Using variation in r," Working Papers 052017, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:052017
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    More about this item

    Keywords

    Financial Flexibility; Collateral Value; Cash Policy; Real Estate Prices;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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