Cash shortfalls and capital structure adjustments: Evidence from Japanese manufacturing firms

This study empirically examines the financing behavior of Japanese firms using the analytical framework of the funding-horizon theory. Using an unbalanced panel of Japanese manufacturing firms for 2000–2024, we estimate a multinomial logit model to identify the determinants of external financing decisions under cash shortfalls. Three main findings emerge. First, under Immediate Depletion, the probability of debt issuance increases substantially, whereas the effects on dual and pure equity issuance remain limited, indicating that Japanese firms strongly prioritize bank borrowing and treat equity issuance as a last resort. Notably, baseline predicted probabilities indicate that external financing events are relatively rare, especially dual and pure equity issuance, which occur in only a small fraction of firm-years. Second, the term spread significantly suppresses debt issuance, while its effect on equity issuance is limited, in contrast to U.S.-based evidence where such effects are often insignificant. Third, higher leverage increases the probability of both debt and equity issuance, suggesting a complementary rather than substitutive financing pattern. These findings are robust to alternative definitions of cash depletion, financing thresholds, and model specifications. Overall, the results highlight the central role of Japan's bank-centered financial system and firms' strong aversion to equity dilution in shaping capital structure adjustments.