Understanding Cash Flow Risk

AuthorL. Mancini, E. Morellec, S. Gryglewicz, E. J. Schroth, P. Valta
JournalReview of Financial Studies
Date27 July 2022
CategoryAcademic Publications
Volume35(8)
Page numbers3922–3973

Theory has recently shown that corporate policies should depend on firms’ exposure to short- and long-lived cash flow shocks and the correlation between these shocks. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions of a canonical cash flow model. As predicted by theory, we find that the estimated parameters are strongly related to corporate liquidity and financing choices, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines the cash flow sensitivity of cash.