|Publication||The impact of liquidity crises on cash flow sensitivities|
University of Hamburg
Cash flow sensitivity, financial constraints, liquidity crises, investment spending, supply side shock
Estimation of a multi-equation cash flow sensitivities model shows that capital market constraints vary with economic conditions. Since earlier studies use data that covers different economic conditions, their findings smooth-out effects of constraints during liquidity crises. Raising funds is relatively easy during benign liquidity conditions. However, even during less severe liquidity crises, firms experience capital market frictions. Financially weak firms cut investments moderately by rearranging their financing sources. While both financing and investment activities of weak firms were severely affected during the financial crisis of 2007-2009, having financial flexibility enabled financially healthy firms to avoid large reductions in their investments.