The Corporate Propensity to Dissave

Extending the results of Riddick and Whited (2009), we show that firms systematically dissave from liquid assets in response to negative cash flow. This dissaving behavior is consistent with firms' rational willingness to absorb negative productivity shocks and retain assets that could become productive in the future. Dissaving behavior significantly varies with the levels of financial constraints, cash reserves, cash flow uncertainty and losses. Our evidence is obtained within the integrated regression framework, in which the cash flow identity holds implicitly, and using both OLS and q measurement-error consistent estimators. Because a large and growing fraction of U.S. firms yield negative cash flow, the corporate propensity to dissave is a systematic phenomenon.