Leverage and Cash Dynamics

Harry DeAngelo, Andrei S. Gonçalves and René M. Stulz

No 28970, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G31 G33 G35 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-cfn and nep-cwa
Note: CF
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Published as Harry DeAngelo & Andrei S Gonçalves & René M Stulz & Alex Edmans, 2022. "Leverage and Cash Dynamics," Review of Finance, vol 26(5), pages 1101-1144.

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