Seminar: Shira Cohen, Columbia University

Cash, Volatility, and Corporate Investment

Shira Cohen
Columbia University

Date: January 28, 2014
Time: 10:00 am - 11:30 am
Location: Room 310

Abstract: 

I examine the effect of cash holdings on the relationship between cash flow volatility and corporate investment. My results call into question the long-assumed negative association between cash flow volatility and corporate investment. Using an expanded dataset of U.S. domestic firms, I show that firms with high cash holdings increase investment in the face of increasing cash flow volatility, whereas firms with low cash holdings lower their investment expenditure. In doing so, I provide empirical evidence in support of theoretical models predicting that the sensitivity of investment to volatility is dependent on the level of balance sheet cash holdings. I also analyze the mechanism by which cash flow volatility affects investment and show that the relationship between the two is not necessarily driven by how much cash flow volatility a company faces, but rather by how much volatility the company faces after controlling for the ability of balance sheet cash to absorb that volatility.

For more information, please contact Darlene Fowler at: darlene.fowler [at] mcgill.ca.