The Influence of Investment Volatility on Capital Structure and Cash Holdings

This paper studies the relationship between investment volatility, capital structure, and cash levels. Our evidence suggests: i) firms with relatively high capital expenditure volatility hold relatively high levels of both debt and cash, while firms with relatively high acquisition volatility hold relatively high levels of debt and lower levels of cash. Firms with relatively high research and development volatility hold relatively high levels of debt and are not important to determine cash levels, ii) firms fund large capital expenditures, acquisitions and research and development by increasing debt or decreasing cash, iii) immediately after funding large investments firms reduce debt levels and increase cash holdings. Overall, our results are consistent with parts, but not all, of the DeAngelo, DeAngelo and Whited (2011) model. In particular, firm investment volatility is persistent and leads to high debt levels over long periods of time.