How firms manage their cash flows: an examination of diversification's effect

Thang Nguyen, Charlie X Cai, Patrick McColgan

Research output: Contribution to journalArticle

Abstract

We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.
LanguageEnglish
JournalReview of Quantitative Finance and Accounting
Publication statusAccepted/In press - 1 Dec 2015

Fingerprint

Diversification
Cash
Diversified firms
Cash flow
Operating cash flows
Placing
Investment opportunities
Equity
External financing
Finance
Debt
Free cash flow
Cash dividends

Keywords

  • diversification
  • liquidity
  • free cash flow
  • financing cash flow
  • financial management

Cite this

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How firms manage their cash flows: an examination of diversification's effect. / Nguyen, Thang; Cai, Charlie X; McColgan, Patrick.

In: Review of Quantitative Finance and Accounting, 01.12.2015.

Research output: Contribution to journalArticle

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AB - We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.

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