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Causes and Consequences of Cash Flow Sensitivity: Empirical Tests of the U.S. Lodging Industry

ABSTRACT The purpose of this paper is to investigate the causes and consequence of cash flow sensitivity. While cash flow has been regarded as an agency problem, empirical investigations in context of managerial conservatism or optimizing behavior are limited. In this paper, we investigate two key aspects of cash flow sensitivity: whether cash flow sensitivity causes variations in fixed asset investments and if cash flow variations are caused by managerial conservatism. Theoretical models are empirically tested in the U.S. lodging sector. This overall understanding of cash flow sensitivity in the lodging industry through our study contributes to the study of liquidity management practices, capital formation, and investment behavior, and how these are related to overall risk profile of the firm.