Martin Farias

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This paper studies the impact of financial frictions on the allocation of cash flow using administrative data of Spanish non-financial corporations from 2003 to 2019. Employing an analytical framework based on the uses and sources of funds identity, I estimate regression models to examine the allocation of cash flow across its competing uses. My findings reveal that larger financial frictions are, on average, associated with a higher proportion of cash flow allocated to debt repayment and lower proportions allocated to cash savings, investment, and dividend distribution. The analysis also highlights that the effect of financial frictions on the allocation of cash flow varies significantly with variables capturing the economic and financial situation of each firm such as leverage, cash holdings, capital, and the availability of investment opportunities.

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We examine the interaction between banks and Money Market Funds (MMFs) in a setup where the latter can experience large redemptions following an aggregate liquidity shock (as in March 2020). In the model, MMFs and bank deposits are alternatives for firms’ management of their cash holdings. MMFs experiencing correlated redemptions get forced to sell assets to banks in narrow markets, producing asset price declines. Ex post the price declines damage firms’ capacity to cover their needs with the redeemed shares. Ex ante the prospect of such an effect reduces the attractiveness of MMFs relative to bank deposits. Yet the equilibrium allocation of firms’ savings exhibits an excessive reliance on MMFs since firms fail to internalize their effect on the size of the pecuniary externalities caused by future redemptions. This provides a rationale, distinct from first-mover advantages, for the macroprudential regulation of the investment in MMFs.

Preliminary draft available upon request.

This article offers evidence of the behavior and performance of Spanish firms preceding bankruptcy. I estimate a predictive model of bankruptcy which shows that the most important predictors of bankruptcy include measures of equity (net worth), profitability, size, and dividends, as well as the growth rate of aggregate credit. I complement the insights provided by the predictive model with an exploration of the dynamics of firms in the five years preceding bankruptcy, comparing it with the dynamics of firms before exiting the market without filing for bankruptcy. I find that firms arrive at the point of filing for bankruptcy in a very distressed financial situation, after experiencing greater decreases in earnings and equity than firms exiting the market without filing for bankruptcy. Despite this, other measures of the real and financial performance of these firms (investment rates, growth rates of employees, cash savings, and growth rate of account receivables) are mostly similar across the two groups of firms.