Why do firms save cash from cash flows? Evidence from firm-level estimation of cash-cash flow sensitivities

We construct firm-level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced-form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.