Review of Quantitative Finance and Accounting

, Volume 48, Issue 3, pp 701–724 | Cite as

How firms manage their cash flows: an examination of diversification’s effect

Original Research


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.


Diversification Liquidity Free cash flow Financing cash flow Financial management 

JEL Classification

D92 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.


  1. Acharya VV, Almeida H, Campello M (2007) Is cash negative debt? A hedging perspective on corporate financial policies. J Financ Intermed 16:515–554CrossRefGoogle Scholar
  2. Almeida H, Campello M (2010) Financing frictions and the substitution between internal and external funds. J Financ Quant Anal 45:589–622CrossRefGoogle Scholar
  3. Anagnostopoulou CS (2013) Cash holdings: determining factors and impact on future operating performance for listed versus unlisted firms. Rev Pac Basin Financ Mark Policies 16:1–48CrossRefGoogle Scholar
  4. Anderson RI, Stowe JD, Xing X (2011) Does corporate diversification reduce firm risk? Evidence from diversifying acquisitions. Rev Pac Basin Financ Mark Policies 14:485–504CrossRefGoogle Scholar
  5. Bates TW, Kahle KM, Stulz RM (2009) Why do US firms hold so much more cash than they used to? J Finance 64:1985–2021CrossRefGoogle Scholar
  6. Berger P, Ofek E (1995) Diversification’s effect on firm value. J Financ Econ 37:39–65CrossRefGoogle Scholar
  7. Denis DJ, Sibilkov V (2010) Financial constraints, investment, and the value of cash holdings. Rev Financ Stud 23:247–269CrossRefGoogle Scholar
  8. Dimitrov V, Tice S (2006) Corporate diversification and credit constraints: real effects across the business cycle. Rev Financ Stud 19:1465–1498CrossRefGoogle Scholar
  9. Dittmar A, Duchin R (2010) The dynamics of cash. Working paper, University of MichiganGoogle Scholar
  10. Duchin R (2010) Cash holdings and corporate diversification. J Finance 65:955–992CrossRefGoogle Scholar
  11. Gatchev VA, Pulvino T, Tarhan V (2010) The interdependent and intertemporal nature of financial decisions: an application to cash flow sensitivities. J Finance 65:725–763CrossRefGoogle Scholar
  12. Guay W, Harford J (2000) The cash-flow permanence and information content of dividend increases versus repurchases. J Financ Econ 57:385–415CrossRefGoogle Scholar
  13. Hadlock CJ, Ryngaert MD, Thomas SE (2001) Corporate structure and equity offerings: are there benefits to diversification? J Bus 74:613–635CrossRefGoogle Scholar
  14. Hill MD, Fuller KP, Kelly GW, Washam JO (2014) Corporate cash holdings and political connections. Rev Quant Finance Acc 42:123–142CrossRefGoogle Scholar
  15. Hund J, Monk D, Tice S (2010) Uncertainty about average profitability and the diversification discount. J Financ Econ 96:463–484CrossRefGoogle Scholar
  16. Inderst R, Muller HM (2003) Internal versus external financing: an optimal contracting approach. J Finance 63:1033–1062CrossRefGoogle Scholar
  17. Iskandar-Datta ME, Jia Y (2014) Investor protection and corporate cash holdings around the world: new evidence. Rev Quant Finance Acc 43:245–273CrossRefGoogle Scholar
  18. Jagannathan M, Stephens CP, Weisbach MS (2000) Financial flexibility and the choice between dividends and stock repurchases. J Financ Econ 57:355–384CrossRefGoogle Scholar
  19. Jensen MC (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76:323–329Google Scholar
  20. Keynes JM (1936) General theory of employment, interest and money. Harcourt Brace, LondonGoogle Scholar
  21. Kim CS, Mauer DC, Sherman AE (1998) The determinants of corporate liquidity: theory and evidence. J Financ Quant Anal 33:335–359CrossRefGoogle Scholar
  22. Lang LHP, Stulz RM (1994) Tobin’s Q, corporate diversification, and firm performance. J Polit Econ 102:1248–1280CrossRefGoogle Scholar
  23. Lewellen WG (1971) A pure financial rationale for the conglomerate merger. J Finance 26:521–537CrossRefGoogle Scholar
  24. Lyandres E, Palazzo B (2015) Cash holdings, competition, and innovation. J Financ Quant Anal (forthcoming).
  25. Melicher RW, Rush DF (1973) The performance of conglomerate firms: recent risk and return experience. J Finance 28:381–388CrossRefGoogle Scholar
  26. Myers SC (1984) The capital structure puzzle. J Finance 39:574–592CrossRefGoogle Scholar
  27. Opler T, Pinkowitz L, Stulz R, Williamson R (1999) The determinants and implications of corporate cash holdings. J Financ Econ 52:3–46CrossRefGoogle Scholar
  28. Peyer UC (2002) Internal and external capital markets. Working paper, INSEADGoogle Scholar
  29. Pinkowitz L, Stulz RM, Williamson R (2016) Do U.S. firms hold more cash than foreign firms? Rev Financ Stud 29:309–348CrossRefGoogle Scholar
  30. Ruland W, Zhou P (2005) Debt, diversification, and valuation. Rev Quant Financ Acc 25:277–291CrossRefGoogle Scholar
  31. Shleifer A, Vishny RW (1992) Liquidation values and debt capacity: a market equilibrium approach. J Finance 47:1343–1366CrossRefGoogle Scholar
  32. Shyam-Sunder L, Myers SC (1999) Testing static tradeoff against pecking order models of capital structure. J Financ Econ 51:219–244CrossRefGoogle Scholar
  33. Stulz RM (1990) Managerial discretion and optimal financing policies. J Financ Econ 26:3–27CrossRefGoogle Scholar
  34. Subramaniam V, Tang TT, Yue H, Zhou X (2011) Firm structure and corporate cash holdings. J Corp Finance 17:759–773CrossRefGoogle Scholar
  35. Weston JF, Mansinghka SK (1971) Tests of the efficiency performance of conglomerate firms. J Finance 26:919–936CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Thang Nguyen
    • 1
  • Charlie X. Cai
    • 2
  • Patrick McColgan
    • 3
  1. 1.Portsmouth Business SchoolUniversity of PortsmouthPortsmouthUK
  2. 2.Leeds University Business SchoolUniversity of LeedsLeedsUK
  3. 3.Department of Accounting and FinanceUniversity of StrathclydeGlasgowUK

Personalised recommendations