Cash Flow Shock Research Articles

At‐the‐market equity offerings and cash flow shortfalls: Evidence from real estate investment trusts

AbstractThis article examines how access to at‐the‐market (ATM) equity offering programs can help mitigate the adverse effect of temporary cash flow shortfalls on firm performance. Using asset‐level exposure to the spread of COVID‐19 as a proxy for a REIT's sensitivity to a future operational cash flow shock, we find that ATM program access reduces the magnitude of the negative performance effect by nearly 70%. We extend our analysis outside of the pandemic period to provide further evidence of the broader importance of ATM program access as an important source of financial flexibility during more general periods of cash flow uncertainty.

Do Nonfinancial Firms Use Financial Assets to Take Risk?

Abstract Using hand-collected data on financial asset portfolios and exploiting the 2014 oil price crisis as an exogenous cash flow shock, we investigate financial risk-taking at distressed firms. We find that distressed firms, with high debt rollover risk proxied for by short-term liabilities, substantially increase their investments in risky financial assets, including corporate debt, equity, and mortgage-backed securities. The effects are stronger for unhedged firms with low collateral assets. Overall, we provide new evidence that distressed firms take risk using financial assets camouflaged as cash reserves, which, compared to real assets, are less visible and carry lower transaction costs and accelerated payoffs. (JEL G32, G34)

Correlated Cashflow Shocks, Asset Prices, and the Term Structure of Equity

The term structure of equity risk premium is moderately downward-sloping unconditionally, markedly downward-sloping in good times, and markedly upward-sloping in bad times. An asset-pricing model featuring time-varying correlation between realized and expected cashflow shocks explains these puzzling empirical findings. Indeed, the model-implied slope of the equity term structure is in line with the data, both conditionally and unconditionally, because the estimated cashflow shock correlation is volatile, counter-cyclical, and negative on average. The model also generates realistic asset-pricing moments and a positive relation between the equity risk premium, slope of the equity term structure, and the dividend yield. This paper was accepted by David Sraer, finance. Funding: The authors thank the University of Texas at Dallas and the University of Toronto for financial support. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4565 .

Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms

Abstract This paper examines how employee earnings respond to a one-time cash flow shock in the form of a government R&D grant. In a regression discontinuity design, we find that the grant immediately increases average annual employee-level earnings by 2.9$\%$. This benefit accrues only to incumbent employees and rises with job tenure. The grant also affects firm growth, but the initial wage patterns do not appear to reflect growth or productivity. Instead, the evidence supports implicit equity financing within the firm, where employees initially accept lower wages from financially constrained firms and earn more when the firm has ability to pay. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Weathering Cash Flow Shocks

Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank-borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower-friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.

Weathering Cash Flow Shocks

ABSTRACTUnexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank‐borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower‐friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the nonfundamental component of cash flow volatility, especially for solvent, small bank borrowers.

Liquidity shocks and interbank market failures: the role of deposit flights, non-performing loans, and competition

Banks may be reluctant to remove bad loans from their portfolios during liquidity shortfalls, giving rise to a moral hazard problem. In this paper, we analyze how liquidity shortages affect the ability of the interbank market to provide liquidity in a moral hazard setting. We distinguish two types of liquidity shocks that arise due to a deposit flight (a contraction in the deposit supply) or to a cash-flow shock (an increase in the non-performing loans). We show that the source of a liquidity shortfall is the main determinant of the decision of banks to stop lending in the interbank market, rather than the extra amount of funds that banks need to cover. An increase in the non-performing loans has more adverse effects on balance sheets than a deposit flight. We also demonstrate that competition has a dual effect on financial stability. Interbank competition enhances financial stability by reducing the liquidity provision cost, whereas credit market competition worsens financial stability by inducing banks to take riskier profiles.

Debt rollover risk, credit default swap spread and stock returns: Evidence from the COVID-19 crisis

This paper studies how the COVID-19 shock affects the CDS spread changes and abnormal stock returns of U.S. firms with different levels of debt rollover risk. We use the COVID-19 crisis as a quasi-natural experiment of adverse cash flow shock that increases the default risk of firms facing an immediate liquidity shortfall. We find that the COVID-19 shock significantly increased the CDS spread and decreased the shareholder value for firms facing higher debt rollover risk. The effect is stronger for non-financial firms, for firms that are financially constrained, and for firms that are highly volatile. Moreover, we find that firms with immediate refinancing needs suffered more than firms with distant refinancing needs during the COVID-19 shock, which further confirms that firms’ debt rollover risk is indeed a key factor that drives the heterogenous reactions to the shock. The paper provides fresh insights into the role of firms’ debt rollover risk during the COVID-19 health crisis.

Liquidity Management During the Covid‐19 Pandemic*

With the help of the United States Government and committed funding from bank credit lines, the United States corporate sector responded to the Covid‐19 cash flow shock by issuing long‐term debt to increase cash holdings. I use a case study, evidence from recent research, and a theoretical model to explain the logic behind the changes in corporate financial policy that happened during 2020, and to discuss the importance of United States Government policies to support the market for long‐term debt. I also point to open research questions about liquidity management, in particular questions that were highlighted by how companies reacted to the Covid‐19 pandemic.

Liquidity Management During the COVID-19 Pandemic

With the help of the US government and committed funding from bank credit lines, the US corporate sector responded to the COVID-19 cash flow shock by issuing long-term debt to increase cash holdings. I use a case study, evidence from recent research and a theoretical model to explain the logic behind the changes in corporate financial policy that happened during 2020, and to discuss the importance of US government policies to support the market for long-term debt. I also point out to open research questions about liquidity management, in particular questions that were highlighted by how companies reacted to the COVID-19 pandemic.

COVID-19 Isolation, Managerial Sentiment, and Corporate Policies

COVID-19 pandemic lockdowns and mobility restrictions have forced many individuals to work from home, leading to diverse isolation-induced mental health consequences. Using the granularity of foot traffic data, we show that prolonged work from home during the COVID-19 outbreak dampens managerial sentiment. This baseline result is robust to the identification strategy exploiting the staggered implementation of stay-at-home orders across the United States. Further analyses indicate that the induced negative sentiment elevates managers' perceived risk, driving them to accumulate more cash in response to the unprecedented COVID-19 cash-flow shock. But this increase in cash destroys shareholder value.

Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms

This paper examines how employee earnings at small firms respond to a cash flow shock in the form of a government R&D grant. We use ranking data on applicant firms, which we link to IRS W2 earnings and other U.S. Census Bureau datasets. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.07 (0.21) at the employee (firm) level. The beneficiaries are incumbent employees who were present at the firm before the award. Among incumbent employees, the effect increases with worker tenure. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate effect on earnings. Instead, the data and a grantee survey are consistent with a backloaded wage contract channel, in which employees of financially constrained firms initially accept relatively low wages and are paid more when cash is available.

Debt Rollover Risk, Credit Default Swap Spread and Stock Returns: Evidence from the COVID-19 Crisis

This paper studies how the COVID-19 shock affects the CDS spread changes and abnormal stock returns of U.S. firms with different levels of debt rollover risk. We use the COVID-19 crisis as a quasi-natural experiment of adverse cash flow shock that increases the default risk of firms facing an immediate liquidity shortfall. We find that the COVID-19 shock significantly increased the CDS spread and decreased the shareholder value for firms facing higher debt rollover risk. The effect is stronger for non-financial firms, for firms that are financially constrained, and for firms that are highly volatile. Moreover, we find that firms with immediate refinancing needs suffered more than firms with distant refinancing needs during the COVID-19 shock, which further confirms that firms’ debt rollover risk is indeed a key factor that drives the heterogenous reactions to the shock. The paper provides fresh insights into the role of firms’ debt rollover risk during the COVID-19 health crisis.

Liquidity Shocks and Interbank Market Failures: The Role of Deposit Flights, Non-Performing Loans, and Credit Market Competition

Banks may be reluctant to remove bad loans from their portfolios during liquidity shortfalls, giving rise to a moral hazard problem. In this paper, we analyze how liquidity shortages affect the ability of the interbank market to provide liquidity in a moral hazard setting. We distinguish two types of liquidity shocks that arise due to a deposit flight (a contraction in the deposit supply) or to a cash-flow shock (an increase in the non-performing loans). We show that the source of a liquidity shortfall is the main determinant of the decision of banks to stop lending in the interbank market, rather than the extra amount of funds that banks need to cover. An increase in the nonperforming loans has more adverse effects on balance sheets than a deposit flight. We also demonstrate that competition has a dual effect on financial stability. Interbank competition enhances financial stability by reducing the liquidity provision cost, whereas credit market competition worsens financial stability by inducing banks to take riskier profiles.

Debt Maturity Structure and Liquidity Shocks

We analyze the role of a firm's debt maturity structure when refinancing its debt after a liquidity shock that reduces the firm's cash flow. Staggered debt diminishes the share of outstanding debt that a firm has to refinance at any given time, which should be most beneficial for highly levered firms. However, we show that for highly levered firms, a firm's ability to roll over its maturing debt hinges on its ability to prefinance its outstanding debt expiring in future periods. Prefinancing involves holding sufficient cash to repay the outstanding debt when it expires and eliminates the potential benefits of staggered debt. If agency problems prevent a firm from holding sufficient cash to implement this strategy, then staggered debt can reduce a firm's ability to withstand a negative cash flow shock.

Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms

This paper examines how employee earnings at small firms respond to a cash flow shock in the form of a government R&D grant. We use ranking data on applicant firms, which we link to IRS W2 earnings and other U.S. Census Bureau datasets. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.07 (0.21) at the employee (firm) level. The beneficiaries are incumbent employees who were present at the firm before the award. Among incumbent employees, the effect increases with worker tenure. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate effect on earnings. Instead, the data and a grantee survey are consistent with a backloaded wage contract channel, in which employees of financially constrained firms initially accept relatively low wages and are paid more when cash is available. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Enterprise inefficient investment behavior analysis based on regression analysis

Inefficient investment will affect enterprise's survival and long-term development, and ultimately lead to the decline in corporate value. In order to promote the efficiency of the enterprise investment, in this paper, we aim to effectively analyze enterprise inefficient investment behavior, which has great significance in both enterprise management and social resources allocation. Firstly, we propose and analyze some typical enterprise investment theories, such as 1) MM enterprise investment theory, 2) Jorgensen investment theory, and 3) Tobin's q theory. Secondly, we propose a novel enterprise inefficient investment behavior analysis method based on regression analysis. Finally, to demonstrate the effectiveness of the proposed method, we conduct a series of experiments based on the CCER database. Experimental results show that the economy fluctuates across states due to the aggregate cash-flow shock driving the level of aggregate liquidity. Furthermore, we also can see that the particular sample path starts with a series of positive shocks, which can increase the capital value and decrease the cash value.

Asset specificity and firm value: Evidence from mergers

This study explores the effect of asset specificity on a target firm's value in a merger. Using US merger data, I show that, when their industry experiences a negative cash flow shock, target firms that consist of more industry-specific real assets receive a lower merger premium than do those consisting of more generic assets. Results also suggest that the asset specificity discount in the target return is more pronounced if target firms are financially distressed. However, the negative value effect of asset specificity is mitigated in the presence of financially unconstrained industry rivals who place high value on the targets' assets, compete for the targets, and, thereby, are more likely to acquire the targets. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm's value.

The Effects of Cash Flow Uncertainty and Working Capital on Non-Cash Flow Shock Returns

According to the findings of Elton et al. (1999) study, the stock return consists of several components which among them is the cash flow shock return. This means that in prior research, stock return variable were investigated regardless of cash flow shocks. This study investigated the influence of cash flow uncertainty and working capital on non-cash flow shock returns. In this regard, data were gathered from a sample of companies listed on Tehran Stock Exchange from 2004 to 2013. The research hypotheses were examined by multiple regressions. The research results showed that there is a significant relationship between working capital and non-cash flow shock returns. In addition, there is no significant relationship between cash flow uncertainty and non-cash flow shock returns.

Investment Cash Flow Sensitivity: The Role of Cash Flow Volatility

Low cash flow volatility firms receive stronger signals about future cash flow from a given cash flow shock, yielding a larger drop in demand for external finance and their cost of external finance, implying higher investment-cash flow sensitivities (ICFS). Empirical analysis in 6 European countries confirms this. Considering firms with the same cash flow volatility, ICFS are more pronounced for financially constrained firms (cf. Fazzari et al. (1988)). Considering firms with the same level of financial constraints, ICFS are more pronounced for firms with low cash flow volatility (cf. Kaplan and Zingales (1997)). The contradictory findings in the literature may be explained by cash flow volatility.