The Influence of Investment Volatility on Capital Structure and Cash Holdings

32 Pages Posted: 21 Nov 2019

See all articles by Mona Yaghoubi

Mona Yaghoubi

University of Canterbury

Michael O'Connor Keefe

Victoria University of Wellington

Date Written: October 1, 2019

Abstract

This paper studies the relationship between investment volatility, capital structure, and cash levels. Our evidence suggests: i) firms with relatively high realizations of future investment volatility hold relatively low levels of debt and high levels of cash, ii) firms fund large investment by increasing (issuing) debt and/or decreasing (using) cash, iii) immediately after funding large investments firms reduce debt levels and increase cash holdings. Overall, our results are consistent with the DeAngelo, DeAngelo, and Whited (2011) model. In particular, firms with high realizations of future investment volatility keep their debt levels low and cash levels high to finance uncertain future investments.

Keywords: capital structure, cash holding and investment volatility

JEL Classification: G32

Suggested Citation

Yaghoubi, Mona and O'Connor Keefe, Michael, The Influence of Investment Volatility on Capital Structure and Cash Holdings (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3484535 or http://dx.doi.org/10.2139/ssrn.3484535

Mona Yaghoubi (Contact Author)

University of Canterbury ( email )

Private Bag 4800
Christchurch, 8140
New Zealand
02102689100 (Phone)

Michael O'Connor Keefe

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

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