Gryglewicz, S.(., Mancini, L., Morellec, E., Schroth, E. and Valta, P. (2021). Understanding Cash Flow Risk Review of Financial Studies, :.
JournalReview of Financial Studies
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.