Leverage and Cash Dynamics

Fisher College of Business Working Paper No. 2021-03-010

Charles A. Dice Working Paper No. 2021-10

55 Pages Posted: 22 Jun 2021

See all articles by Harry DeAngelo

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: June 17, 2021

Abstract

This paper documents new and empirically important interactions between cash-balance and leverage dynamics. Cash ratios typically vary widely over extended horizons, with dynamics remarkably similar to (and complementary with) those of capital structure. Leverage and cash dynamics interact approximately as predicted by the internal-versus-external funding regimes in Myers and Majluf (1984). Leverage is quite volatile when cash ratios are stable and vice-versa, while net-debt ratios are almost always volatile. Most firms increase leverage sharply as cash balances (internal funds) become scarce. Capital structure models that extend Hennessy and Whited (2005) to include cash-balance dynamics explain some, but not all, aspects of the observed relation between cash squeezes and leverage increases.

Keywords: capital structure, cash balances, leverage dynamics, financial flexibility, payout policy

JEL Classification: G31, G33, G35

Suggested Citation

DeAngelo, Harry and Gonçalves, Andrei and Stulz, Rene M., Leverage and Cash Dynamics (June 17, 2021). Fisher College of Business Working Paper No. 2021-03-010, Charles A. Dice Working Paper No. 2021-10, Available at SSRN: https://ssrn.com/abstract=3871170 or http://dx.doi.org/10.2139/ssrn.3871170

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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