Agency Conflicts and the Cash Flow Sensitivity of Cash in Australia

Abstract

This thesis investigates the primary influences of cross-sectional variation in the cash flow sensitivity of cash in Australian firms over the period 1994-2013. Financial constraints are found to significantly increase the sensitivity of a firm’s cash holdings to internally generated cash flows. The role of corporate governance is examined and agency conflicts are identified to have a significant influence on liquidity management. I provide evidence in favour of the costly contracting hypothesis impacting poorly governed firm’s liquidity policy. Alternative influences, such as industry and financial distress are also shown to explain cross-sectional variation in liquidity management. Ultimately, I find that liquidity policy is not purely driven by a firm’s financial constraint, but however a collective mix of several influences on firm behaviour.