Critical Finance Review > Vol 9 > Issue 1-2

Firms from Financially Developed Economies Do Not Save Less

Alexander A. Vadilyev, College of Business and Economics, Australian National University, Australia,
Suggested Citation
Alexander A. Vadilyev (2020), "Firms from Financially Developed Economies Do Not Save Less", Critical Finance Review: Vol. 9: No. 1-2, pp 305-351.

Publication Date: 11 Jun 2020
© 2020 Alexander A. Vadilyev
Corporate propensity to save/dissaveExternal finance constraintsCash flow uncertaintyFinancial development$q$ measurement error


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In this article:
1. Hypothesis Development and Brief Literature Review 
2. Research Design and Data 
3. Replication of Khurana et al. (2006) 
4. Analysis 
5. Conclusion 
Appendix A. Replication of a Study by Riddick and Whited (2009) 


Contrary to evidence in Khurana et al. (2006), I find that firms from financially developed economies do not have systematically smaller propensities to save out of cash flow. This new result occurs for two interrelated reasons. First, cash flow uncertainty affects saving propensities at least as much as do external finance constraints. Second, although financial development eases external finance constraints, it also contributes to greater cash flow uncertainty through more innovation and higher asset intangibility. This cross-country result holds for financially constrained firms and those with greater cash flow uncertainty. The inverse relation between financial development and saving propensities can hold only for unconstrained firms and those with lower uncertainty. Liberalization of stock markets further bolsters the results.