How Do Firms Finance Large Cash Flow Requirements?
نویسندگان
چکیده
How do firms finance large cash flow requirements? We examine this in the context of firms that are subject to substantial cash flow requirements. We find that trade credit, inventory and cash stock reductions are all important in the short term for mild requirements. Larger and longer cash flow shortages give rise to more equity than debt finance. After the shocks, firms gradually adjust their leverage back to pre-shock levels by retiring debt and issuing equity. Financing patterns during a shock are consistent with a pecking-order theory of finance, whereas the adjustment afterwards is consistent with a trade-off theory. JEL Classification: G32
منابع مشابه
Agency Costs, Free Cash Flow and It Expenditures
1.0 INTRODUCTION In the past few decades, U.S. businesses have made large investments in information technology (IT), without decisive evidence about the value of such investments [1]. A natural question that arises in this context is whether managers have wasted organizational resources through large investments in IT. In his well-known free cash flow hypothesis, Michael Jensen argues that man...
متن کاملWhich Investments Do Firms Protect? Liquidity Management and Real Adjustments When Access to Finance Falls Sharply
We study how firms engaged in both R&D and fixed investment manage liquidity and adjust real investment during the recent financial crisis. Among firms with positive R&D expenditures, cuts to fixed investment in the crisis are typically far more severe than cuts to R&D. These firms allocate cash reserves to buffer R&D but do not use cash to protect fixed investment. Some firms appear to go so f...
متن کاملFree Cash Flow, Institutional Ownership and Long-Term Performance
Performance appraisal is a process which help shareholders make informed and optimal investment decisions. In recent decades, a long stream of research has devoted particular attention to the importance and impact of financial decisions on firm performance and firm value. The present study thus is primarily concerned with investigating the association between free cash flow and institutional ow...
متن کاملDo Financing Constraints Matter for R&D? New Tests and Evidence
Information problems and lack of collateral value should make R&D more susceptible to financing frictions than other investments, yet existing evidence on whether financing constraints limit R&D is decidedly mixed, particularly in studies of non-U.S. firms. We study a large sample of European firms and show that prior studies likely understate the impact of financing constraints on R&D because ...
متن کاملErasmus Research Institute of Management Report Series Research in Management Bibliographic Data and Classifications
This paper examines the relation between cash-flow availability and investment spending in the Netherlands. In particular, we are interested whether managerial discretion and/or asymmetric information drive the positive relation between cash-flow and investment spending. This relation is positive for both firms with low and high investment opportunities. It is however significantly larger for f...
متن کامل