Review of Finance Vol. 26 No. 5 2022

Leverage and Cash Dynamics

Harry DeAngelo¹; Andrei S. Gonçalves²; René M. Stulz³

¹ Marshall School of Business, University of Southern California , · ² Fisher College of Business, The Ohio State University , · ³ Fisher College of Business, The Ohio State University, NBER, and ECGI ,

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.

DOI

10.1093/rof/rfac043

Volume

26

Issue

5

Pages

1101-1144

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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