Abstracts

Khurana, Martin and Pereira (2006) and the following studies find that the sensitivity of cash holdings to cash flows (referred to as the cash flow sensitivity of cash) decreases with the level of financial development; that is, firms from financially developed countries are less exposed to financing constraints and thus exhibit a lower propensity to save cash out of their cash flows. While financing frictions are arguably less binding on such firms, the negative relationship with a country’s financial development holds only if the cash flow sensitivity of cash is linear. Using a large sample of public firms from 44 markets and over the 1995 to 2010 period, the study reveals that (i) corporate propensity to save cash from internal cash flows is non-linear and highly sensitive to the sign of cash flow, and (ii) the inverse relationship between a country’s financial development and cash-cash flow sensitivity becomes insignificant after controlling for the non-linearity. The findings further support the hypothesis that positive cash flow firms persistently save cash from internal resources regardless of the financial market advances. Negative cash flow or loss-making firms are also insensitive to the level of financial development because their access to capital markets is generally limited or closed. In conclusion, my results signify that corporate saving propensities reflect a multitude of forces to be independent from cross-country financial integration.