Weathering Cash Flow Shocks

Brown, James Robert; Gustafson, Matthew; Ivanov, Ivan T.

doi:10.1111/jofi.13024

Cited by 155 publications

(40 citation statements)

References 69 publications

(39 reference statements)

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“…To identify the individual liquidity shocks of each firm, we also focus on the cash flow crisis proxied by EBITDA (used by Brown et al, 2021 ). We estimated the following equation:

where bank borrowings from bank j are dependent variables for firm i in year t .…”

Section: Estimation Strategymentioning

confidence: 99%

Lending relationships and a corporate liquidity shortage: Evidence from the COVID‐19 shock in Japan

Tsuruta

2022

Manage Decis Econ

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We investigate the effects of lending relationships between banks and borrowers on loan supply during the economic shock caused by the coronavirus (COVID‐19) pandemic. Using bank–firm matched data for Japan to control for several firm‐ and bank‐specific unobserved effects, we show that banks with close relationships with borrowing firms offer more bank loans to these firms during the COVID‐19 shock. This effect is larger if the borrowing firms' cash flows decrease substantially during the shock. These results imply that banks acted as liquidity providers for borrowers during sudden and unpredictable shocks if their relationships with firms were close.

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“…To identify the individual liquidity shocks of each firm, we also focus on the cash flow crisis proxied by EBITDA (used by Brown et al, 2021 ). We estimated the following equation:

where bank borrowings from bank j are dependent variables for firm i in year t .…”

Section: Estimation Strategymentioning

confidence: 99%

Lending relationships and a corporate liquidity shortage: Evidence from the COVID‐19 shock in Japan

Tsuruta

2022

Manage Decis Econ

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“…Perez-Gonzalez and Yun (2013) report that utility firms' revenues are sensitive to weather variation and that the availability of weather derivatives allows these firms to partially hedge this risk. 4 Along related lines, Brown et al (2021) find that many private firms that have weather-sensitive demand rely heavily on banks to financially buffer them from extreme weather shocks. Dessaint and Matray (2017) demonstrate that some firms may even overreact in their financial response to extreme weather events (hurricanes) because of a managerial bias to overweight recent experiences.…”

Section: Weathermentioning

confidence: 99%

Doing good when doing well: evidence on real earnings management

2021

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We provide evidence on earnings management by exploiting temporary exogenous shocks to utility firms’ sales arising from weather variation. We find that sample firms’ sales are highly sensitive to annual changes in average temperatures in the region where the firm operates, but this sensitivity disappears quickly as one moves down the income statement. This evidence, while indirect, is suggestive of earnings management activities. In search of direct evidence, we study charitable giving decisions by sample firms and uncover a significant positive sensitivity of charitable spending to weather-driven demand shocks, behavior that is highly consistent with the presence of real earnings management efforts. We find no convincing evidence supporting possible alternative explanations for this evidence, but we do find limited support for the presence of a larger giving–weather relation when earnings management incentives are likely to be elevated. If other real decisions with similar characteristics scale proportionally to charitable giving, our findings suggest that the overall magnitude of real earnings management activities could be quite substantial.

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“…Additionally, larger firms may be better placed to receive external funding as they are well known to investors (e.g. to private equity funds, as noted by Wilson, Amini and Wright, 2020), generate more geographically diversified cash flows and are less opaque since financial information is easily available and often reliable (Brown, Gustafson and Ivanov, 2020;Demirguc-Kunt, Peria and Tressel, 2020). However, there is no prior evidence in the literature on whether firm size matters for access to alternative finance in the aftermath of a catastrophic event.…”

Section: Literature Review and Research Hypothesesmentioning

confidence: 99%

“…At the firm level, natural disasters result in a greater firm demand for funds and heightened credit constraints. There is greater demand for funds intended to restore damages caused by natural disasters, maintain business continuity, secure liquidity positions and develop new opportunities (Barth, Sun and Zhang, 2019;Brown, Gustafson and Ivanov, 2020;Koetter, Noth and Rehbein, 2020). Greater credit constraints occur because traditional sources of finance (especially bank loans) may not be available, since extreme natural events increase acute physical risks, which lead to a deterioration in firms' creditworthiness and ability to borrow from banks.…”

Section: Introductionmentioning

confidence: 99%

Alternative Finance after Natural Disasters

Baltas

Fiordelisi

Mare

2021

British J of Management

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In this paper, we show that alternative finance (e.g. private equity, crowdfunding and venture capital) is a key source of funding for firms that are affected by natural disasters. Using data on a large sample of US companies from 2010 to 2019, we provide robust empirical evidence that private funding increases within 3 months after the occurrence of a natural disaster. Panel data analysis at state level shows that extreme events cause at least an average increase of funding from alternative finance by 47% relative to firms in non-affected states. We also find that size, reliance on physical assets and age improve access to alternative finance after adverse natural events. Our empirical evidence highlights the key role of private lenders in providing financial resources to affected firms after extreme exogenous events. Disclaimer: This paper's findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, their Executive Directors or the countries they represent. We thank the editors of the British Journal of Management special issue: Douglas Cumming, Pawan Budhar and Geoffrey Wood. We would also like to thank the two anonymous referees for providing us with very constructive feedback and valuable comments. We thank for useful comments the participants at the conference on 'Entrepreneurial Finance in Honour of Mike Wright' and especially our discussant, Maimuna Akter.

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Weathering Cash Flow Shocks

Cited by 155 publications

References 69 publications

Lending relationships and a corporate liquidity shortage: Evidence from the COVID‐19 shock in Japan

Lending relationships and a corporate liquidity shortage: Evidence from the COVID‐19 shock in Japan

Doing good when doing well: evidence on real earnings management

Alternative Finance after Natural Disasters

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