Cash Flow For Manufacturing And Wholesale Companies: Do You Know Your Breakeven Cash Flow?

The authors study the relationships between firms' internally generated cash flows and their investment, financing, and distribution decisions. Unlike previous studies that examine the cash flow sensitivity of investments in isolation, the authors consider a model where firms make their investment and financing decisions jointly, subject to the constraint that sources and uses of funds are equal. The authors find that the cash flow sensitivity of investment is small compared to the cash flow sensitivity of financing. Whereas a one dollar increase in cash flow causes a $0.03 increase in net investments ($0.07 increase in capital expenditures), it causes a $0.86 reduction in net debt and a $0.11 increase in shareholder distributions.