A semi-parametric analysis of the cash flow sensitivity of cash

Abstract

Using a semi-parametric approach that allows for a flexible functional form and a large firm-level international dataset, we re-examine the contentious issue of whether the cash flow sensitivity of cash is positive or negative. Our findings suggest that the cash flow sensitivity of cash is negative at lower levels of cash flow and positive at higher levels, which could explain the mixed results in the literature. Additionally, we find that the cash flow sensitivity of cash varies based on different levels of cash flow, across time, and among developing and developed countries for estimates based on non-parametric methods. Our findings contradict those based on parametric methods that assume a linear functional form and suggest no significant asymmetries in the cash flow sensitivity of cash.