Asymmetric Cash Flow Sensitivity of Cash Holdings

Document Type : Research Paper


1 Assistant Prof. in Accounting, Tarbiat Modares University, Tehran, Iran

2 Ph.D. Student in Accounting, Islamic Azad University, Science and Research Branch, Kermanshah, Iran


This research documents the asymmetric corporate cash
flow sensitivity of cashholdings. Using a sample of 630 firm-years
(companies in Tehran Stock Exchange were selected for years 1384 to
1390) the corporate reactions to changes in their cash holdings in case
of negative and positive cash flows were examined. For testing the
hypothesisabout asymmetric cash flow sensitivity, Riddick and
Whited (2009) models were used. Results show that firms have
different level of responses to their cash holding when faces positive
and negative cash flow: meaning that the relation between cash
holding and positive cash flow is different than relation between cash
holding and negative cash flow. We document that the cash flow
sensitivity of cash flow is negative when a firm faces a positive cash
flow environment, and the cash flow sensitivity of cash flow is
positive when a firm faces negative cash flow. This asymmetry may
be due to several reasons, including binding project contracts, bad
news withholding and agency costs.