IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v29y2019icp393-397.html
   My bibliography  Save this article

Cash flow risk and capital structure decisions

Author

Listed:
  • Harris, Christopher
  • Roark, Scott

Abstract

We identify a link between cash flow risk, capital structure decisions and operating cash flows. Firms with higher cash flow volatility have higher debt levels and this positive link is only for firms with the weakest financial performance as measured by operating cash flow. When firms are ranked based on operating cash flows, those in the bottom half increase their use of leverage in the face of increasing cash flow risk. For firms with operating cash flows that are in the upper half, the link between cash flow risk faced by the firm and its use of leverage is not statistically significant.

Suggested Citation

  • Harris, Christopher & Roark, Scott, 2019. "Cash flow risk and capital structure decisions," Finance Research Letters, Elsevier, vol. 29(C), pages 393-397.
    • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:393-397
    DOI: 10.1016/j.frl.2018.09.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612317305597
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2018.09.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Pindado, Julio & Requejo, Ignacio & Rivera, Juan C., 2017. "Economic forecast and corporate leverage choices: The role of the institutional environment," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 121-144.
    2. Mark T. Leary & Michael R. Roberts, 2014. "Do Peer Firms Affect Corporate Financial Policy?," Journal of Finance, American Finance Association, vol. 69(1), pages 139-178, February.
    3. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    4. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    5. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    6. Faulkender, Michael & Smith, Jason M., 2016. "Taxes and leverage at multinational corporations," Journal of Financial Economics, Elsevier, vol. 122(1), pages 1-20.
    7. Sebastian J. Reinartz & Thomas Schmid, 2016. "Production Flexibility, Product Markets, and Capital Structure Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 29(6), pages 1501-1548.
    8. Harry DeAngelo & Andrei S Gonçalves & René M Stulz, 2018. "Corporate Deleveraging and Financial Flexibility," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 3122-3174.
    9. Fama, Eugene F. & French, Kenneth R., 2004. "New lists: Fundamentals and survival rates," Journal of Financial Economics, Elsevier, vol. 73(2), pages 229-269, August.
    10. Faccio, Mara & Xu, Jin, 2015. "Taxes and Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(3), pages 277-300, June.
    11. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    12. David J. Denis & Stephen B. McKeon, 2012. "Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1897-1929.
    13. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    14. Keefe, Michael O'Connor & Yaghoubi, Mona, 2016. "The influence of cash flow volatility on capital structure and the use of debt of different maturities," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 18-36.
    15. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Jianhua & Zhao, Zhao & Jian, Wenqing, 2020. "Do cash flow imbalances facilitate leverage adjustments of Chinese listed firms? Evidence from a dynamic panel threshold model," Economic Modelling, Elsevier, vol. 89(C), pages 201-214.
    2. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.
    3. Mundi, Hardeep Singh, 2022. "CEO social capital and capital structure complexity," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    4. Albert Danso & Samuel Fosu & Samuel Owusu‐Agyei & Collins G. Ntim & Emmanuel Adegbite, 2021. "Capital structure revisited. Do crisis and competition matter in a Keiretsu corporate structure?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5073-5092, October.
    5. Mirza, Nawazish & Rahat, Birjees & Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2023. "Impact of Covid-19 on corporate solvency and possible policy responses in the EU," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 181-190.
    6. Bing Wang & Kung‐Cheng Ho & Xinyu Liu & Yan Gu, 2022. "Industry cash flow volatility and stock price crash risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 356-371, March.
    7. Xin Cui & Shouyu Yao & Zhenming Fang & Hua Wang, 2021. "Economic policy uncertainty exposure and earnings management: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3937-3976, September.
    8. Alica Tobisova & Andrea Senova & Gabriela Izarikova & Ivana Krutakova, 2022. "Proposal of a Methodology for Assessing Financial Risks and Investment Development for Sustainability of Enterprises in Slovakia," Sustainability, MDPI, vol. 14(9), pages 1-14, April.
    9. Sai Ding & Minjoo Kim & Xiao Zhang, 2021. "New Insight on Investment-Cash Flow Sensitivity," Working Papers 2021_16, Business School - Economics, University of Glasgow.
    10. Richard Yeaw Chong Seow, 2023. "Comparative Financial Performance and Firm Valuation Analysis: A Malaysian Logistics Service Provider Case Study," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 594-613, July.
    11. Yang, Daecheon & Kim, Hyuntae, 2020. "Managerial overconfidence and manipulation of operating cash flow: Evidence from Korea✰," Finance Research Letters, Elsevier, vol. 32(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeAngelo, Harry, 2021. "Corporate financial policy: What really matters?," Journal of Corporate Finance, Elsevier, vol. 68(C).
    2. Weiping Hu & Xiao Zhang & Ye He, 2024. "Cash flow sensitivity of cash: when should we use it to measure financial constraints?," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 637-682, February.
    3. G. Oka Warmana & I. Ketut Rahyuda & Ida Bagus Anom Purbawangsa & Ni Luh Gede Sri Artini, 2020. "Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(3), pages 215-231, September.
    4. Paseda, Oluseun & Olowe, Rufus, 2018. "The Debt Maturity Structure of Nigerian Quoted Firms," MPRA Paper 117061, University Library of Munich, Germany, revised 30 Jun 2018.
    5. Machokoto, Michael & Areneke, Geofry, 2020. "Does innovation and financial constraints affect the propensity to save in emerging markets?," Research in International Business and Finance, Elsevier, vol. 52(C).
    6. An, Zhe & Li, Donghui & Yu, Jin, 2016. "Earnings management, capital structure, and the role of institutional environments," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 131-152.
    7. Lee, Chi-Chuan & Lee, Chien-Chiang & Xiao, Shunyi, 2021. "Policy-related risk and corporate financing behavior: Evidence from China’s listed companies," Economic Modelling, Elsevier, vol. 94(C), pages 539-547.
    8. Katagiri, Mitsuru, 2014. "A macroeconomic approach to corporate capital structure," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 79-94.
    9. Andrea Nocera & M. Hashem Pesaran, 2022. "Causal Effects of the Fed's Large-Scale Asset Purchases on Firms' Capital Structure," CESifo Working Paper Series 9695, CESifo.
    10. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
    11. Pindado, Julio & Requejo, Ignacio & Rivera, Juan C., 2017. "Economic forecast and corporate leverage choices: The role of the institutional environment," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 121-144.
    12. Sai Ding & Minjoo Kim & Xiao Zhang, 2021. "New Insight on Investment-Cash Flow Sensitivity," Working Papers 2021_16, Business School - Economics, University of Glasgow.
    13. Ampenberger, Markus & Schmid, Thomas & Achleitner, Ann-Kristin & Kaserer, Christoph, 2009. "Capital structure decisions in family firms: empirical evidence from a bank-based economy," CEFS Working Paper Series 2009-05, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    14. Bigelli, Marco & Martín-Ugedo, Juan Francisco & Sánchez-Vidal, F. Javier, 2014. "Financial conservatism of private firms," Journal of Business Research, Elsevier, vol. 67(11), pages 2419-2427.
    15. Anshu Agrawal, 2020. "Modified Total Interpretive Structural Model of Corporate Financial Flexibility," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(4), pages 369-388, December.
    16. Kanwal Iqbal Khan & Faisal Qadeer & Mário Nuno Mata & José Chavaglia Neto & Qurat ul An Sabir & Jéssica Nunes Martins & José António Filipe, 2021. "Core Predictors of Debt Specialization: A New Insight to Optimal Capital Structure," Mathematics, MDPI, vol. 9(9), pages 1-25, April.
    17. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    18. Vidhan K. Goyal & Frank Packer, 2017. "Capital Structure in Emerging Asia," HKUST IEMS Working Paper Series 2017-48, HKUST Institute for Emerging Market Studies, revised Dec 2017.
    19. Li, Xiang & Su, Dan, 2020. "How does economic policy uncertainty affect corporate debt maturity?," IWH Discussion Papers 6/2020, Halle Institute for Economic Research (IWH).
    20. Xiaoyi Li & Yung-Ming Shiu, 2021. "Reinsurance, debt capacity and financial flexibility," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(4), pages 664-687, October.

    More about this item

    Keywords

    Capital structure; Cash flow volatility; Operating cash flow;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:393-397. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.