Firm Characteristics and Cash-Cash Flow Sensitivity: An Assessment for Pakistani Manufacturing Firms
Author: Saddiqa

The main purpose of this study is to examine the determinants of the sensitivity of cash holdings to cash flows. The study also aims to examine whether the impact of the determinants of cash flow volatility differs across financially constraint and financially unconstraint firms, across firms having high and low Tobin’s Q, and across high and low levered firms. Finally the study also examines the firm-specific determinants of positive and negative sensitivity of cash to cash flows. For this purpose, we sort out the firm-year observations where the correlation between cash and cash flow is positive and negative. To identify the financial constraint and unconstraint firms, we use WW index. Specifically, base as the median value of WW index we classify the firms into financial constraint and unconstraint. Similarly based on the median value of Tobin’s Q and leverage we cluster the firms as high growth, low growth, and high levered and low levered firms. We use the two step system GMM estimations to estimate the empirical model. The study uses unbalanced firmlevel annual panel data set covers the period 2000-2014. The key findings of the study are as follows. Our results are consistent with the core rationale that constrained firms face more difficulties than their unconstraint counterparts when looking for funding from external markets. As a result, financially constraint firms are more conscience about propensity to save cash out of cash inflows than that of their unconstraint counterpart. However, the results regarding the role of growth potentials in the firm characteristics and cash and cash flow sensitivity reveal that the absolute correlation between cash and cash flow of high-growth firms are more sensitive than low-growth firms. Finally, we find that there exist the differential effects of cash flow and cash holdings across high-levered and lowlevered firms. Absolute correlation between cash and cash flow of high-levered firms are positively affected by to all variables used in the model except for leverage. However, low levered firms’ absolute correlation between cash and cash flow negatively affected by one period lagged size, dividend payout ratio, cash flow volatility and market to book value, whereas, they are positively related to the one period lagged absolute correlation between cash and cash flow and the leverage. Supervisor:- Dr. Abdul Rashid

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Keywords : Cash, Cash-Cash Flow Sensitivity, Cash-Cash Flow SensitivityFinancial Constraint, Financial Unconstraint, Liquidity, System GMM
Supervisor: Abdul Rashid

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