Abstract
We examine firms’ simultaneous choice of investment, debt financing and liquidity in a large sample of US corporates between 1984 and 2015 with regard to their cash-flow sensitivities. We differentiate firms according to their (external) financial constraints and their (internal) needs to hedge against future shortfalls in operating income. Our estimation approach shows that internal frictions weaken the cashflow sensitivities of all corporate decisions, so that firms with low hedging needs display the strongest investment increases, debt reductions and cash savings with rising cash flows. External frictions, in contrast, weaken the cash-flow sensitivity of investment and debt changes but strengthen the propensity to save cash out of cash flows. Interestingly, cash-flow sensitivities have weakened considerably due to the financial crisis 2007/08 for unconstrained firms, but hardly for constrained businesses.
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