How Do Firms Finance Large Cash Flow Requirements?

Colin Mayer and CZhangkai Huang

No 2008fe06, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: How do firms finance large cash flow requirements? We examine this in the context of firms that are subject to substantial cash flow requirements. We find that trade credit, inventory and cash stock reductions are all important in the short term for mild requirements. Larger and longer cash flow shortages give rise to more equity than debt finance. After the shocks, firms gradually adjust their leverage back to pre-shock levels by retiring debt and issuing equity. Financing patterns during a shock are consistent with a pecking-order theory of finance, whereas the adjustment afterwards is consistent with a trade-off theory.

Keywords: Cash Flow Shocks; Equity Issues; Trade-Off Theory; Pecking-Order Theory (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2008-01-01
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Citations: View citations in EconPapers (3)

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