Leverage and Cash Dynamics*

Is cash negative debt? A hedging perspective on corporate financial policies

Harry DeAngelo, Andrei S Gonçalves and René M Stulz

Review of Finance, 2022, vol. 26, issue 5, 1101-1144

Abstract: This article 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, J. Finan. Econ., 13, 187–221.). 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, J. Finan., 60, 1129–1165.) 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 (search for similar items in EconPapers)
JEL-codes: G31 G33 G35 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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