The cash flow sensitivity of cash

Heitor Almeida, Murillo Campello, Michael S. Weisbach

Research output: Contribution to journalReview articlepeer-review


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.

Original languageEnglish (US)
Pages (from-to)1777-1804
Number of pages28
JournalJournal of Finance
Issue number4
StatePublished - Aug 2004
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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