The Long and Short of Cash Flow Shocks and Debt Financing

65 Pages Posted: 14 Aug 2018 Last revised: 18 Nov 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: Novermber 15, 2019

Abstract

We investigate how debt financing responds to exposure to long-lived and temporary cash flow shocks. We identify these shocks using filtering methods that we demonstrate are highly effective for corporate finance data using Monte-Carlo simulations. The long-lived and temporary shocks we identify for our sample of US firms have distinct economic roots. Consistent with predictions from theoretical models, we find that firms with higher relative exposure to long-lived cash flow shocks maintain higher leverage. Firms also issue more debt following cash flow increases arising from long-lived 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., The Long and Short of Cash Flow Shocks and Debt Financing (Novermber 15, 2019). 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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