Cash flow risk and capital structure decisions

Harris, Christopher M.; Roark, Scott

doi:10.1016/j.frl.2018.09.005

Cited by 54 publications

(56 citation statements)

References 15 publications

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“…The negative effect of investment on cash is in line with studies reporting that firms with high investments reduce cash, for cash is employed to finance investments (Kalcheva & Lins, 2007;Huang et al, 2013;Caprio et al, 2013;Chen et al, 2014). Leverage and working capital are associated with lower cash holdings, in line with a trade-off explanation of capital structure and cash holdings decisions (Frank & Goyal, 2009;Ferreira & Vilela, 2004;Harris & Roark, 2018)…”

Section: Accepted Manuscriptsupporting

confidence: 81%

Foreign institutional ownership and corporate cash holdings: Evidence from emerging economies

Loncan

2020

International Review of Financial Analysis

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With the increased presence of foreign institutional investors in emerging stock markets, academic interest on the effects of foreign institutions on corporate managerial decisions has notably increased. This paper joins this debate by investigating the effects of foreign institutional ownership on cash holdings, a strategic corporate financing choice. Analysing a sample of firms from 23 emerging economies, the paper shows that, while foreign institutional ownership has a negative effect on cash holdings, it also increases the contribution of cash to firm valuation. These effects are potentially transmitted to cash through mitigation of agency conflicts and alleviation of financing constraints. In all, our findings suggest beneficial effects of foreign institutions on firms' financing structure, as foreign investors contribute to a more efficient and value-enhancing cash policy.

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Section: Accepted Manuscriptsupporting

confidence: 81%

Foreign institutional ownership and corporate cash holdings: Evidence from emerging economies

Loncan

2020

International Review of Financial Analysis

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“…This may be because larger firms do not take advantage of having more bargaining power over creditors or bankers than smaller firms to borrow long term; also, liquidity problems limit the firm from borrowing long term, and liquidity management is a critical issue for success. Harris and Roark (2019) find that firms with higher cash flow volatility have higher debt levels, but 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 flow, those in the bottom half increase their use of leverage in the face of increasing cash flow risk.…”

Section: Literature Reviewmentioning

confidence: 80%

“…The authors also find that firms at risk of running out of cash in a particular fiscal year are 11 times more likely to issue debt than firms that do not face the same risk. Harris and Roark (2019) find that cash flow volatility has a positive and significant relationship with the use of debt in the capital structure. However, Mateev et al (2013) find that if firms have more available internal funds, then they will take fewer external funds, which supports pecking order theory.…”

Section: Earning Volatilitymentioning

confidence: 86%

“…Determining the factors associated with debt ratios depends on the two opposing theories outlined above: trade-off theory and pecking order theory. However, Frank and Goyal (2008) and Harris and Roark (2019) provide a rationale for why, even with these two dominating theories, capital structure theory lacks a single model to help identify the determinants of capital structure choice.…”

Section: Literature Reviewmentioning

confidence: 99%

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Determinants of capital structure: evidence from Malaysian firms

Saif‐Alyousfi

Md-Rus

Mohd

et al. 2020

APJBA

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PurposeThe purpose of this paper is to examine the determinants of capital structure using a dataset of firms in Malaysia.Design/methodology/approachThis paper carries out a panel data analysis of 8,270 observations from 827 listed non-financial firms on the Malaysia stock market over the period 2008–2017. To estimate the model and analyse the data collected from the DataStream and World Bank databases, the authors use static panel estimation techniques as well as two-step difference and system dynamic GMM estimator.FindingsThe results show that profitability, growth opportunity, tax-shield, liquidity and cash flow volatility have a negative and significant impact on debt measures. However, the effects of collateral, non-debt tax and earnings volatility on measures of debt are positive and significant. In addition, firm size, firm age, inflation rate and interest rate are important determinants of the present value of debt. The results also show a significant inverse U-shaped relationship between the firm's age and its capital structure. In general, the results support the proposition advocated by the pecking order and trade-off theories.Practical implicationsThe results of this study necessitate formulation of various policy measures that can counter the effects of debt on firms.Originality/valueThe present study is among the earliest to use both the book and market value measures of capital structure. It also uses three proxies for each: total debt, long-term debt and short-term debt. It incorporates earning volatility and cash flow volatility as new independent variables in the model. These variables have not previously been used together with both book and market value measures of capital structure. The study also examines the non-monotonic relationship between firm's age and capital structure using a quadratic regression method. It applies both static panel techniques and dynamic GMM estimation techniques to analyse the data.

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“…In a distressed scenario, the weakening fundamentals will result in a drag on cash flows that leads to an increase in debt payback and insufficient coverage ( Keefe & Yaghoubi, 2016 ). This is plausible because cash flows sensitivity plays a vital role in capital structure optimization ( Harris & Roark, 2019 ; Park, 2019 ) and financial flexibility ( Drobetz, Haller, Meier, & Tarhan, 2017 ).…”

Section: Empirical Strategy For Solvency Assessment and Policy Responmentioning

confidence: 99%

Impact of Covid-19 on corporate solvency and possible policy responses in the EU

Mirza

Rahat

Naqvi

et al. 2023

The Quarterly Review of Economics and Finance

142

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Highlights A decline of market capital from Covid-19 will increase the default likelihood. The mining, construction and retail sectors are most vulnerable to market shock. Given a moderate deterioration in economic profile, a tax deferral is sufficient. For exacerbating shocks, debt and equity support is essential to avoid a meltdown.

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Cash flow risk and capital structure decisions

Cited by 54 publications

References 15 publications

Foreign institutional ownership and corporate cash holdings: Evidence from emerging economies

Foreign institutional ownership and corporate cash holdings: Evidence from emerging economies

Determinants of capital structure: evidence from Malaysian firms

Impact of Covid-19 on corporate solvency and possible policy responses in the EU

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