Abstract

http://ssrn.com/abstract=2255792
 
 

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Financial Flexibility and Short-Term Financing Needs: Evidence from Seasonal Firms


Douglas J. Fairhurst


University of Arizona - Eller College of Management

November 21, 2013


Abstract:     
Firms that face seasonal demand account for an important fraction of the U.S. economy. However, there is surprisingly little evidence on these firms’ financing decisions. Yet, studying these decisions provides a natural setting to shed light on the types of capital (i.e. cash or debt) that firms use to manage short-term financing needs. Using seasonal firms as a setting to examine this issue, I show that seasonal financing needs are met with debt with low exposure to information asymmetry, such as short-term debt and trade credit. I further show that cash reserves, which have high carrying costs and can at time lead to agency problems, are not used for seasonal financing needs. Further, as financial flexibility theory would predict, I document that seasonal firms maintain more conservative financial policies to increase the ability to use debt for short-term financing needs. Specifically, seasonal firms are less levered and have long-term debt with a longer average maturity. Further, seasonal firms adjust toward leverage targets slower during fiscal quarters when debt is used for short-term financing. Overall, my findings indicate that firms minimize costs associated with short-term financing needs by using debt with low issuance costs and that use of this debt impacts the overall capital structure of the firm.

Number of Pages in PDF File: 49

Keywords: Short-term Financing, Cash Holdings, Trade Credit, Seasonal Demand, Capital Structure

JEL Classification: G32, G31

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Date posted: April 23, 2013 ; Last revised: December 10, 2013

Suggested Citation

Fairhurst, Douglas J., Financial Flexibility and Short-Term Financing Needs: Evidence from Seasonal Firms (November 21, 2013). Available at SSRN: http://ssrn.com/abstract=2255792 or http://dx.doi.org/10.2139/ssrn.2255792

Contact Information

Douglas J. Fairhurst (Contact Author)
University of Arizona - Eller College of Management ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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