Impact of cash flow volatility on cash-cash flow sensitivity of Pakistani firms

Abstract

The purpose of this study was to analyze the impact of volatility of cash flows on cash-cash flow sensitivity of Pakistani firms. Data was randomly taken from 62 different firms listed on Pakistan stock exchange. Sample years were from 2011 to 2015.The variables involved were cash flows (CF), cash flow volatility coefficient (CFCV), Leverage (lev), Size and Sales growth (SG). Collinearity matrix, descriptive statistics and common effect model were used to find out the results. The result conducted by the study from sample data proved that there is a significant relation among cash flow volatility and cash-cash flow sensitivity. The precautionary motive of the firm as observed by Keynesian in his theory is the main motive behind sensitivity of cashcash flows of Pakistani firms. The result of all firm’s data revealed that Pakistani firms hold more cash out of their cash flows in order to avoid future uncertainty related to default risk or unavailability of external finances. The result of correlation matrix too reveals that large size firms have less volatility as compared with small size firms. To understand the results better, also firms were divided into constrained and unconstrained categories based on their size. The result also revealed that both constrained and unconstrained firms have volatility in their cash flows but firms with large size are shown to have lower volatility than small size firms. The reason behind volatility in constrained firms is due to fewer opportunities for growth available to them and for unconstrained firms, the main factor behind cash flow volatility is leverage.