The Effects of Working Capital Balances on Financial Leverage

56 Pages Posted: 13 Nov 2019 Last revised: 29 Jun 2021

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Özde Öztekin

Florida International University (FIU)

Date Written: November 1, 2019

Abstract

A firm’s working-capital account balances (payables, receivables, and inventory) significantly affect its leverage, credit rating, and security issuances. Payables crowd out debt. Higher receivables and inventories raise leverage, reflecting their relatively low risk and/or their ability to provide financial adaptability. Working capital components also significantly affect firm credit ratings and security issuance decisions. These effects are sizeable: a one standard-deviation increase in payables (receivables) crowds out (raises) leverage by 0.42 (066) standard deviations. Difference-in-difference tests based on two regulatory shocks to working-capital payment policies indicate that these relationships are causal.

Keywords: Working Capital, Inventories, Receivables, Payables, Capital Structure, Leverage

JEL Classification: G18, G21, G28

Suggested Citation

Flannery, Mark Jeffrey and Öztekin, Özde, The Effects of Working Capital Balances on Financial Leverage (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3479180 or http://dx.doi.org/10.2139/ssrn.3479180

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Özde Öztekin (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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