Firms' Financing Dynamics Around Lumpy Capacity Adjustments

57 Pages Posted: 18 Feb 2021

See all articles by Christoph Görtz

Christoph Görtz

University of Birmingham - Department of Economics

Plutarchos Sakellaris

Athens University of Economics and Business

John D. Tsoukalas

University of Glasgow - Department of Economics

Date Written: February 12, 2021

Abstract

We study how firms adjust their financial positions around the times when they undertake lumpy adjustments in capital or labor. Using U.S. data from Compustat, we show that there are discernible patterns of financing lumpy adjustment, remarkably similar across capital and labor, but quite distinct between expansionary and contractionary lumpy adjustment episodes. We find strong evidence that both cash and debt capacity are actively manipulated to increase financial flexibility in the years before the ensuing expansion of firm capacity. Debt and cash contribute to financing the investment in capital or labor and leverage continues to rise significantly for two years after the lumpy expansion was initiated. Lumpy contractions are undertaken after years that show reductions in cash balances and above average levels of debt. During and after the contraction, firms rebuild cash and reduce debt growth significantly. These patterns are consistent with firms acting to restore financial health by adjusting their productive operations. We document that lumpy expansions and contractions in capital or employment are systematic time series drivers of firms' leverage and cash balance dynamics.

Keywords: Lumpy Adjustment, Firm Capital and Employment Dynamics, Leverage, Debt, Cash, Financial Flexibility.

JEL Classification: G30, G32, E32

Suggested Citation

Görtz, Christoph and Sakellaris, Plutarchos and Tsoukalas, John D., Firms' Financing Dynamics Around Lumpy Capacity Adjustments (February 12, 2021). Available at SSRN: https://ssrn.com/abstract=3784669 or http://dx.doi.org/10.2139/ssrn.3784669

Christoph Görtz

University of Birmingham - Department of Economics ( email )

United Kingdom

Plutarchos Sakellaris (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece
+302108203304 (Phone)
+3012108203383 (Fax)

John D. Tsoukalas

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

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