Impact of Cashflow Volatility on Cash-Cash Flow Sensitivity of Pakistani Firms

Abstract

This study is conducted to observe the impact of cash flow volatility (CVCF) on cash-cash flow sensitivity of Pakistani Manufacturing Firms by taking a panel data of 377 manufacturing firms listed on Karachi Stock Exchange. The test revealed that cash flow volatility had significant impact on cash-cash flow sensitivity. This sensitivity was due to the precautionary motive of Pakistani Manufacturing Firms. Further, cash-cash flow sensitivity was studied by classifying firms into constrained and unconstrained categories by using cash flow volatility (CVCF) and size. The results for the classification based on cash flow volatility (CVCF) reveals that cash-cash flow sensitivity is more due to long-term debt for constrained firms and due to sales growth for unconstrained firms. The results for the classification based on size reveals that cash-cash flow sensitivity is present in both constrained and unconstrained firms. However, in constrained firms this sensitivity is mainly due to growth opportunities available to those firms. While in unconstrained firms this sensitivity can be attributed to increase leverage and resultant increased in cash flow volatility (CVCF) due to leverage.