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Financing Lumpy Adjustment

Author

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  • Christoph Görtz
  • Plutarchos Sakellaris
  • John D. Tsoukalas

Abstract

We Study how firms finance Lumpy adjustment in capital, employment and inventories. We analyse U.S. firm data from Compustat covering 1971-2013. Lumpy expansion and contraction episodes in firms' productive assets are important in accounting for movements in macroecnomic and financial aggregate variables. Firms use primarily cash balances and debt in order to expand or contract capacity, but these margins are not perfect substitutes. Cash balances play a preparatory role rising (falling) temporarily prior to lumpy positive (negative) adjustment. Debt is also important as firms de-leverage (increase leverage) prior to lumpy positive (negative) adjustment and then slowly increase leverage (deleverage) often several years after the event. Small and large firms differ in their use of external equity to finance Lumpy events. During Lumpy adjustment profitability and leverage are positively correlated.

Suggested Citation

  • Christoph Görtz & Plutarchos Sakellaris & John D. Tsoukalas, 2017. "Financing Lumpy Adjustment," Working Papers 2017_06, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2017_06
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    More about this item

    Keywords

    Lumpy firm adjustment; Event study; Leverage; Debt; Cash; Financing.;
    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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