Skip to main content Accessibility help

Where Did All the Dollars Go? The Effect of Cash Flows on Capital and Asset Structure

  • Sudipto Dasgupta (a1), Thomas H. Noe (a2) and Zhen Wang (a3)


This paper documents the short- and long-term balance sheet effect of cash flows. We show that cash savings in the short run and debt reduction in both the short and the long run account for a substantial fraction of cash flow use. Although, in the long run, investment exhibits substantial sensitivity to cash flows, investment does not absorb the entire cash flow shock. In fact, the tighter the financial constraints, the smaller the fraction of cash flow absorbed by investment and the more by leverage reduction. Firms stage their response to increases in cash flow, delaying investment while building up cash stocks and reducing leverage. These results suggest that much of the short-run economic effect of cash flow shocks to the corporate sector may be channeled into the corporate debt market rather than the capital goods market, especially when financing constraints tighten.



Hide All
Acharya, V. V.; Almeida, H.; and Campello, M.. “Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies.” Journal of Financial Intermediation, 16 (2007), 515554.
Allayannis, G., and Mozumdar, A.. “The Impact of Negative Cash Flow and Influential Observations on Investment-Cash Flow Sensitivity Estimates.” Journal of Banking and Finance, 28 (2004), 901930.
Almeida, H.; Campello, M.; and Weisbach, M. S.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 17771804.
Alti, A.How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?Journal of Finance, 58 (2003), 707722.
Altinkiliç, O., and Hansen, R. S.. “Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs.” Review of Financial Studies, 13 (2000), 191218.
Altman, E. I. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589609.
Baltagi, B. H., and Wu, P. X.. “Unequally Spaced Panel Data Regressions with AR(1) Disturbances.” Econometric Theory, 15 (1999), 814823.
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 132.
Blanchard, O. J.; Lopez-de-Silanes, F.; and Shleifer, A.. “What Do Firms Do with Cash Windfalls?Journal of Financial Economics, 36 (1994), 337360.
Bushman, R. M.; Smith, A. J.; and Zhang, X. F.. “Investment Cash Flow Sensitivities Really Reflect Related Investment Decisions.” Working Paper, available at (2011).
Chang, X.; Dasgupta, S.; and Hilary, G.. “Analyst Coverage and Financing Decisions.” Journal of Finance, 61 (2006), 30093048.
Cleary, S.The Relationship between Firm Investment and Financial Status.” Journal of Finance, 54 (1999), 673692.
Dasgupta, S., and Sengupta, K.. “Corporate Liquidity, Investment and Financial Constraints: Implication from a Multi-Period Model.” Journal of Financial Intermediation, 16 (2007), 151174.
Diamond, D. W. “Debt Maturity Structure and Liquidity Risk.” Quarterly Journal of Economics, 106 (1991), 709737.
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” American Economic Review, 74 (1984), 650659.
Erickson, T., and Whited, T.. “Measurement Error and the Relationship between Investment and Q.” Journal of Political Economy, 108 (2000), 10271057.
Faccio, M.; Lang, L. H. P.; and Young, L.. “Dividends and Expropriation.” American Economic Review, 91 (2001), 5478.
Faulkender, M., and Petersen, M. A.. “Does the Source of Capital Affect Capital Structure?Review of Financial Studies, 19 (2006), 4579.
Fazzari, S. M.; Hubbard, R. G.; and Petersen, B. C.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1 (1988), 141195.
Gatchev, V. A.; Pulvino, T.; and Tarhan, V.. “The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities.” Journal of Finance, 65 (2010), 725763.
Gomes, J. F. “Financing Investment.” American Economic Review, 91 (2001), 12631285.
Hayashi, F.Tobin’s Marginal q and Average q: A Neoclassical Interpretation.” Econometrica, 50 (1982), 213224.
Kaplan, S. N., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?Quarterly Journal of Economics, 112 (1997), 169215.
Kaplan, S. N., and Zingales, L.. “Investment-Cash Flow Sensitivities Are Not Valid Measures of Financing Constraints.” Quarterly Journal of Economics, 115 (2000), 707712.
Kim, W., and Weisbach, M. S.. “Motivations for Public Equity Offers: An International Perspective.” Journal of Financial Economics, 87 (2008), 281307.
Lee, G., and Masulis, R. W.. “Seasoned Equity Offerings: Quality of Accounting Information and Expected Flotation Costs.” Journal of Financial Economics, 92 (2009), 443469.
Lucas, D. J., and McDonald, R. L.. “Equity Issues and Stock Price Dynamics.” Journal of Finance, 45 (1990), 10191043.
Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48 (1958), 261297.
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147175.
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187221.
Opler, T.; Pinkowitz, L.; Stulz, R.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 346.
Riddick, L. A., and Whited, T. M.. “The Corporate Propensity to Save.” Journal of Finance, 64 (2009), 17291766.
Thode, H. C. Testing for Normality. New York, NY: Marcel Dekker (2002).
Tobin, J.A General Equilibrium Approach to Monetary Theory.” Journal of Money, Credit and Banking, 1 (1969), 1529.
Type Description Title
Supplementary materials

Dasgupta supplementary Appendix
Dasgupta supplementary Appendix

 PDF (47 KB)
47 KB

Where Did All the Dollars Go? The Effect of Cash Flows on Capital and Asset Structure

  • Sudipto Dasgupta (a1), Thomas H. Noe (a2) and Zhen Wang (a3)


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed