The Cash Flow Sensitivity of Cash


  • Heitor Almeida,

  • Murillo Campello,

  • Michael S. Weisbach

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    • Almeida is at New York University. Campello and Weisbach are at the University of Illinois. We thank an anonymous referee, Rick Green (the editor), Viral Acharya, Dan Bernhardt, Matt Billett, Long Chen, Ted Fee, Jon Garfinkel, John Graham, Charlie Hadlock, Jarrad Harford, Harrison Hong, George Pennacchi, Eric Rasmussen, René Stulz, Toni Whited, and Jeffrey Wurgler for their very helpful suggestions. Comments from seminar participants at the November 2002 NBER Corporate Finance Meeting, Duke University, Georgia State University, Indiana University, Louisiana State University, New York University, New York Federal Reserve Bank, University of Illinois, and University of Iowa are also appreciated.


We model a firm's demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm's propensity to save cash out of cash flows (the cash flow sensitivity of cash). We hypothesize that constrained firms should have a positive cash flow sensitivity of cash, while unconstrained firms' cash savings should not be systematically related to cash flows. We empirically estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory.