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The purpose of this paper is to provide empirical insight into the impact of a financial crisis on capital structure of private firms. Specifically, the authors use the example of the systemic Icelandic financial crisis from 2008 to 2010 and analyze the influence of internally generated funds on leverage during the financial crisis compared to the non-crisis period.

The authors use a fixed-effects dynamic model to examine the impact of internally generated funds – measured as cash flow – with a data set that includes non-listed Icelandic firms. In addition, generalized method of moments is used to address potential endogeneity issues.

The authors find that internally generated funds have a different effect on capital structure during the financial crisis compared to the non-crisis period. While cash flow has an overall negative association with leverage, a positive relationship appears to exist during the crisis. However, when analyzing changes in cash flow from one year to the other, the sample firms appear to rely more on internally generated funds to adjust leverage during the financial crisis than in the non-crisis period.

Analyzing the extreme case of the Icelandic financial crisis allows us to shed light on capital structure effects in situations when both debt financing and internal financing opportunities are heavily curtailed.

In this article, modifications are suggested for the current format of the cash flow statement, which is prescribed by AC 118, in order to address ambiguities and improve comparability. This redefinition of activities, together with the alteration of the layout, leads to a better explanation of the cash‐generating function of an enterprise. The authors argue that the separation of the cash flow for the maintenance of the existing resource base and the cash flow for the expansion thereof, is essential information in a model for the prediction of the future cash flow generation of a company. The resultant increase in the accessibility, reliability and utility of cash flow reporting should enhance users’ economic decision making and liberalise financial information. The modifications proposed in the article can therefore assist standard setters to improve financial reporting.

The purpose of this paper is to examine how managers of African firms, operating in environments characterised by less developed capital markets and weak institutional structures, make use of their internally generated cash flows.

The authors use a panel data methodology which regresses a particular use of cash flow (e.g. capital expenditure) on the internally generated operating cash flow of a firm and a set of control variables. The estimation of the regression model is done by ordinary least squares regressions. For robustness, the authors also estimate the models using system generalised method of moments to control for endogeneity and measurement error problems.

The authors find that managers of African firms hold most of their internally generated cash flows, and when they decide to spend, they allocate a higher proportion towards dividend payments; followed by debt adjustments; then to investments; and lastly, to equity repurchases.

The findings are consistent with the existence of a significant financial constraint in African markets, and the use of dividends to signal credit quality in relatively underdeveloped capital markets.

The authors provide a more extensive analysis of how a firm spends a unit of the incremental cash flow it generates. In particular, the analysis shows that beyond investments in capital expenditure, other cash flow uses (i.e. cash holdings, dividend payments, and adjustments in debt and equity capital) which have been largely overlooked in the literature are important to understanding the effects of financial constraints on corporate decisions. Also, the early empirical evidence on the cash flow allocations of African firms could be a step in the right direction in informing theory development in this area.

The results of recent surveys of businesses indicate that cash flow is the single most important problem they face. The business press has noted that “cash‐flow planning is one of the more difficult and vulnerable areas in business management,” and that “businessmen can't understand why…they [are] running out of cash.” In fact, it's safe to suggest for companies of any size that cash is the lifeblood of the firm, and that a company's cash‐planning practices can be a critical early warning device of impending financial trouble.

This study aims to investigate the influence of economic policy uncertainty (EPU) and geopolitical risk (GPR) on the relationship between internal cash flow and external financing in an emerging market, Saudi Arabia. It also examines the role of asset tangibility and financial crisis in establishing this relationship.

The sample was taken from non-financial sector companies listed on the Saudi Stock Exchange between 2002 and 2019. The data were analyzed using panel data regression analysis, including ordinary least squares and fixed effects model. The author addresses potential endogeneity through the generalized method of moments.

This study found that both EPU and GPR reduce the sensitivity of external financing to internal cash flow. This implies that firms depend more on internally generated funds during periods of increased EPU and GPR. Besides, this study found that the influence of EPU and GPR on the sensitivity of external financing to internal cash flow is more (less) negative for more tangible firms (during the financial crisis period). This result implies that Saudi firms boasting a higher level of tangibility are more flexible when it comes to seeking external financing. However, the presence of uncertainty during the crisis period makes the external financing costly, and therefore, firms will be less likely to raise funds from external sources.

This study has important implications for managers, policymakers and regulators. First, the paper findings provide insights for corporate decision-makers in helping them to focus on internal funds to finance their investment during uncertain times. Second, the findings help managers to understand the role of asset tangibility in raising external funding when firms face financial constraints due to uncertainty. Third, this study also helps corporates to focus on internal funds to finance their investment during the crisis period because EPU and GPR increase the cost of external finance. Finally, the results provide guidelines for policymakers and regulators to make appropriate policy measures to increase the easy availability of external finance during periods of increased EPU and GPR.

This paper is the first to shed light on the impact of internal funds on external financing while paying close attention to the role of EPU and GPR.

The purpose of this paper is to examine the effect of Sharia-compliance (SC) on investment sensitivity to internal funds in oil rich countries.

A fixed-effect panel technique with OLS regression is used to investigate such relationship applying data from a sample of 207 non-financial firms listed on the Gulf Cooperation Council (GCC) stock markets over the period 2009–2014.

The results show that the investment-cash flow (ICF) sensitivity is positive, and is a lot larger for more constrained firms. Compared to developed markets, the results show higher ICF sensitivity in GCC countries. The evidence also shows that SC decreases the dependence of firms on internally generated funds when undertaking new investment projects. Unexpectedly, the results reveal that the ICF sensitivity increases when liquidity becomes abundant. Additional analysis suggests that investment expenditures of firms display a greater sensitivity to cash flow in the crisis period.

The implications of this study are that SC is a nature of business that reduces the propensity of corporations to undertake inefficient investments that are derived from capital market imperfections. However, manager ability to overinvest increases when liquidity is abundant suggesting that cash-rich firms are more likely to engage in value-decreasing projects.

The proposed study presents several originalities. First, it provides evidence on ICF sensitivity in specific emerging economies, namely the GCC countries. Second, it highlights the issue of efficient investment. For this purpose, the present paper focuses on Sharia-compliant (SC) firms where financial constraints are bound to be more stringent than for non-Sharia-compliant (NSC) firms. Finally, the study findings enable us to investigate what the sudden abundance of liquidity, generated by the record levels of oil prices, as well as the financial crisis implied for the ICF relationship.

The purpose of this paper is to document the relation between investment-cash flow sensitivity and a firm’s engagement in corporate social responsibility (CSR) activities in European context. Specifically, this paper aims to empirically examine how CSR moderates the sensitivity between investment spending and firm internal funds.

The Euler equation technique approach is applied to test the sensitivity of investment to internally generated funds for a panel data set of 398 European companies listed in the STOXX Europe 600 during 2009-2014. Furthermore, a mediated moderation model is developed in order to examine the moderating role of CSR in the investment-cash flow sensitivity, as well as the mediating role of agency costs on the moderation effect of CSR.

The results show that CSR performance weakens the sensitivity of investment to internal funds; agency costs of free cash flow mediate the negative moderating effect of CSR on investment-cash flow sensitivity. Thus, this study demonstrates empirically that firms with socially responsible practices are better positioned to obtain financing in the capital markets through reducing market frictions as well as agency costs.

Firms are invited to engage more in CSR activities that reduce agency conflicts between management and shareholders.

The originality of this paper consists in proposing the establishment of both direct and indirect link between CSR and investment-cash flow sensitivity.

This study provides a large sample comparison of research and development (R&D) spending intensity in private and public firms and the extent to which these firms' unique characteristics affect their R&D spending rate.

The study compares both private and public data from UK firms for the period 2006–2016, generating a total matched 232,029 firm-year observations, and applies a probability model technique to our large panel datasets.

The authors uncover that private firms show lower R&D spending intensity compared to their public counterparts. The authors evidence also shows that privately owned firms in the technological (non-technological) sector display higher (lower) probability of R&D spending intensity. Compared with public firms, the authors further observe that the intensity of private firms' R&D spending increases with higher internal cash flow, leverage and industry information quality. The authors results remain robust to alternative econometric models.

Despite the findings of this study, the authors would like to point out that the use of a single country's data limits the generalisability of our findings. Thus, future studies may also consider extending this study across multiple countries.

A key implication of our study is that private firms are more likely to finance R&D intensity from the internally generated cash flow compared to the public ones. This stems from the fact that private firms are more likely to experience higher costs in raising external finance for innovative activities than public firms. Thus, easy access to funding for private firms is vital for enhancing R&D activities of the private firms.

By combining both private and public firms' datasets, the authors are able to provide new evidence to suggest that the intensity of private firms' R&D spending is dependent on internal cash flow, leverage and the industry information level. In fact, to the best of the authors’ knowledge, this is the first study that explores these relationships.

This paper aims to examine the interdependence of financial decisions (investment, financing, dividends and cash-holding) under financial constraints.

The authors specify and estimate a system of simultaneous equations with panel data and firm fixed effects by three-stage least squares in a sample of firms from 62 countries from 1996 to 2010.

The main findings largely corroborate previous studies regarding the interdependence of financial decisions. The authors also find evidence suggesting that financial constraints have a major impact on firms’ financial decisions. The results also suggest that financial constraints manifest themselves in virtually all firms, indicating that such constraints are a matter of degree and not of kind.

Implications regarding the impact of cash flows on investment and cash-holding decisions are only partially confirmed.

The results are consistent with the hypothesis that financial constraints distort the financial policies of firms. For the purpose of formulating policies that reduce these distortions, the authors emphasize the role of the availability of internal funds and the recoverable fraction of assets in easing financial constraints, thus allowing for greater investment on the part of firms.

The results suggest that regulators should promote policies that reduce the dependence of corporate investment on internally generated cash flows.

Unlike previous studies, the authors account for the direct impact endogenous variables could have on each other. In addition, they explore the impact of each country’s particular legal environment on the pledgeability of assets at the company level.

The purpose of this paper is to examine whether prior bank lending relationships affect firms’ liquidity management.

The authors mainly work on evaluating first, whether prior lending relationships affect corporate cash holdings? and second, whether the cash flow sensitivity of cash varies systemically with lending relationships. Three different ways are used to define lending relationships, including the lending relationship dummy, a firm’s maximum relationship intensity in terms of number of deals across all lenders and a firm’s maximum relationship intensity in terms of dollar amounts across all lenders. In addition, the paper applies two-stage least squares (2SLS) to address the concern of endogeneity between firms’ liquidity management and banking relationships.

The authors find that firms with lending relationships maintain a lower level of cash holdings and save less cash out of cash flow. Furthermore, the effect of lending relationships is more profound for firms with high cash flow. The results suggest that prior lending relations alleviate information asymmetry, lower the cost of capital and therefore affect firms’ propensity to retain cash and maintain a high level of cash holdings.

This paper contributes to both the liquidity management literature and the literature on the value of maintaining lending relationships with banks. Researchers should take into consideration the lending relationships built over the course of the lending when assessing firms’ cash policies.

Bank lending relationship mitigates the information asymmetry problem, one type of market friction, and facilitates firms’ future external financing, thereby affecting firms’ cash policies and giving more flexibility in liquidity management. The value of lending relationships distinguishes bank loans from public bonds. Therefore, firms, especially those facing more information asymmetry issue, should take into account the benefits from lending relationships in their future debt financing.

Extant literature examines how firm characteristics affect firms’ cash holdings. This paper introduces a new factor that could explain corporate cash policy.