Norges Bank

Working Paper

Real and financial tradeoffs in non-listed firms: Cash flow sensitivities and how they change with shocks to firms' main-bank

Author:
Charlotte Ostergaard, Amir Sasson, and Bent E. Sørensen.
Series:
Working Paper
Number:
27/2010

Abstract
We study how non-listed firms trade off financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect corporate trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flows. Our analysis suggests that external finance constraints affect the real economy via firms' marginal value of cash.

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ISSN 1502-8143 (online)

Published 15 December 2010 16:37
Published 15 December 2010 16:37