Composition of Cash Flow Shocks and Debt Financing

60 Pages Posted: 14 Aug 2018 Last revised: 17 Jan 2019

See all articles by Seong K. Byun

Seong K. Byun

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Valery Polkovnichenko

Federal Reserve Board - Divison of Research and Statistics

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: December 18, 2018

Abstract

We investigate empirically how exposure to long-lived and temporary shocks to firm cash flows affects debt financing. We identify persistent and temporary cash flow shocks using filtering methods, and demonstrate these methods are highly effective for corporate finance data using Monte-Carlo simulations. Our empirical estimates indicate that firms with higher relative exposure to persistent cash flow shocks maintain higher leverage, consistent with existing theoretical implications. Furthermore, firms issue more debt following higher cash flows attributable to persistent as opposed to temporary shocks. This link between cash flow shocks and debt financing is economically large and long-lived. It is primarily driven by profitable firms and stronger among less financially constrained firms.

Keywords: capital structure, permanent and transitory shocks

Suggested Citation

Byun, Seong K. and Polkovnichenko, Valery and Rebello, Michael J., Composition of Cash Flow Shocks and Debt Financing (December 18, 2018). Available at SSRN: https://ssrn.com/abstract=3222960 or http://dx.doi.org/10.2139/ssrn.3222960

Seong K. Byun

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Valery Polkovnichenko (Contact Author)

Federal Reserve Board - Divison of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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