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How Do Firms Finance Large Cash Flow Requirements

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Author Info
Zhangkai Huang
Colin Mayer
Oren Sussman

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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.

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Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe06.

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Length: 32
Date of creation: 2008
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Handle: RePEc:sbs:wpsefe:2008fe06

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Related research
Keywords: Cash flow shocks; equity issues; trade-off theory; pecking-order theory.;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  2. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 1-24, March. [Downloadable!]
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  4. Colin Mayer & Oren Sussman, 2003. "A New Test of Capital Structure," OFRC Working Papers Series 2003fe16, Oxford Financial Research Centre. [Downloadable!]
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  5. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July. [Downloadable!] (restricted)
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  12. Jalilvand, Abolhassan & Harris, Robert S, 1984. " Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study," Journal of Finance, American Finance Association, vol. 39(1), pages 127-45, March. [Downloadable!] (restricted)
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  17. Hovakimian, Armen & Hovakimian, Gayane & Tehranian, Hassan, 2004. "Determinants of target capital structure: The case of dual debt and equity issues," Journal of Financial Economics, Elsevier, vol. 71(3), pages 517-540, March. [Downloadable!] (restricted)
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