Leverage and Cash Dynamics*

doi:10.1093/rof/rfac043

Leverage and Cash Dynamics*

2022-07-05

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DOI：10.1093/rof/rfac043

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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 , 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 , 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

Leverage and Cash Dynamics*

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