Analysis of quarterly cash flow components: Various effects on cash flow response coefficients

Date of Completion

January 2000


Business Administration, Accounting




This research examines whether quarterly CFRCs of major CF components and their subcomponents vary with firm-specific and industry conditions, and across fiscal quarter. ^ This study finds that variation in operating CFRC is positively related to growth, length of operating cycle, financial leverage, quality of investment opportunities (free CF; book-value q), and operating CF persistence, and negatively related to macroeconomic conditions and firm size; and that financing CFRC is positively related to growth and quality of investment opportunities (book-value q). Investing CFRC is positively related to growth, but negatively associated with quality of investment opportunities. CFRCs for debt issuance, stock issuance, capital expenditure, and long-term investment are positively related to quality of investment opportunities, but CFRCs for dividend payments and acquisition are negatively related to quality of investment opportunities. The negative change in CFRC with acquisition so dominates the effect of other investing CF components that investing CFRC becomes negative with good investment opportunities. ^ Another notable finding in this study is that variations in all CFRCs influenced by firm-specific conditions are nonlinear with respect to the relative size of operating CF to market value. The positive change in operating CFRC depends not only on the quality of investment opportunities but also on relative size of operating CF. Changes in CFRC across industry also reveal that CFRC of certain industries behave differently relative to various firm-specific factors. For example, the service and manufacturing industries have highly positive operating, financing, and investing CFRC; mining, and retail/wholesale industries, and public utilities have highly negative CFRC. Operating CFRC and ERC behave differently across fiscal quarters. ERC in the fourth fiscal quarter is smaller than in the second and third quarters, and operating CFRC is greater than ERC in the corresponding third and fourth quarters. Furthermore, the standard deviation of ERC in the fourth quarter is greater than in the first, second, and third quarters. ^