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Title: Cash flow sensitivities and bank-finance shocks in non-listed firms

Authors: Charlotte Ostergaard; Amir Sasson; Bent E. Sorensen

Addresses: Department of Finance, BI Norwegian Business School, Nydalsveien 37, 0442, Oslo, Norway ' Department of Strategy and Entrepreneurship, BI Norwegian Business School, Nydalsveien 37, 0442, Oslo, Norway ' Department of Economics, McElhinney Hall, University of Houston, 4800 Calhoun Rd, Houston, TX 77004, USA

Abstract: We study how small firms manage cash flows by estimating cash flow sensitivities for all sources and uses of cash. Our data are Norwegian non-listed firms which can be matched to the banks they borrow from. Firms with low cash holdings mainly use external finance to offset cash flow fluctuations over the cycle, whereas firms with high cash holdings rely mainly on internal finance. Estimating how cash flow sensitivities change with exogenous bank shocks, we find that the cyclicality of cash-poor firms' investment is amplified because they do not substitute internal for external finance. Our results imply that for small firms, the transmission of financial shocks to the real economy is closely tied to their accumulation of cash.

Keywords: cash holdings; cash management; small firms; cash flow sensitivity; bank lending channel.

DOI: 10.1504/IJBAAF.2020.104483

International Journal of Banking, Accounting and Finance, 2020 Vol.11 No.1, pp.35 - 70

Received: 17 Oct 2017
Accepted: 31 Mar 2018

Published online: 13 Jan 2020 *

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