Working Paper: NBER ID: w28970
Authors: Harry DeAngelo; Andrei S. Gonalves; Ren M. Stulz
Abstract: This paper documents new and empirically important interactions between cash-balance and leverage dynamics. Cash ratios typically vary widely over extended horizons, with dynamics remarkably similar to (and complementary with) those of capital structure. Leverage and cash dynamics interact approximately as predicted by the internal-versus-external funding regimes in Myers and Majluf (1984). Leverage is quite volatile when cash ratios are stable and vice-versa, while net-debt ratios are almost always volatile. Most firms increase leverage sharply as cash balances (internal funds) become scarce. Capital structure models that extend Hennessy and Whited (2005) to include cash-balance dynamics explain some, but not all, aspects of the observed relation between cash squeezes and leverage increases.
Keywords: No keywords provided
JEL Codes: G31; G33; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash availability (E41) | leverage decisions (G11) |
| cash squeezes (E51) | increase in leverage (G32) |
| cash dynamics (E41) | changes in capital structure (G32) |
| stability of cash ratios (G32) | volatility of leverage ratios (G32) |
| historically high net debt ratios (G32) | less volatile leverage ratios (G32) |