How firms manage their cash flows: an examination of diversification’s effect
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We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.
KeywordsDiversification Liquidity Free cash flow Financing cash flow Financial management
JEL ClassificationD92 G32
We thank Anna Danielova, Andrew Marshall, Isaac Tabner, seminar participants at the University of Stirling, as well as participants at the 4th International Accounting and Finance Doctoral Symposium, and the 2015 Financial Management Association annual meeting for their helpful comments and suggestions on earlier versions of this paper.
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