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Cash flow risk and capital structure decisions

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  • Harris, Christopher
  • Roark, Scott

Abstract

We identify a link between cash flow risk, capital structure decisions and operating cash flows. Firms with higher cash flow volatility have higher debt levels and 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 flows, those in the bottom half increase their use of leverage in the face of increasing cash flow risk. For firms with operating cash flows that are in the upper half, the link between cash flow risk faced by the firm and its use of leverage is not statistically significant.

Suggested Citation

  • Harris, Christopher & Roark, Scott, 2019. "Cash flow risk and capital structure decisions," Finance Research Letters, Elsevier, vol. 29(C), pages 393-397.
    • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:393-397
    DOI: 10.1016/j.frl.2018.09.005
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    Cited by:

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    2. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.
    3. Alica Tobisova & Andrea Senova & Gabriela Izarikova & Ivana Krutakova, 2022. "Proposal of a Methodology for Assessing Financial Risks and Investment Development for Sustainability of Enterprises in Slovakia," Sustainability, MDPI, vol. 14(9), pages 1-14, April.
    4. Mundi, Hardeep Singh, 2022. "CEO social capital and capital structure complexity," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    5. Sai Ding & Minjoo Kim & Xiao Zhang, 2021. "New Insight on Investment-Cash Flow Sensitivity," Working Papers 2021_16, Business School - Economics, University of Glasgow.
    6. Richard Yeaw Chong Seow, 2023. "Comparative Financial Performance and Firm Valuation Analysis: A Malaysian Logistics Service Provider Case Study," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 594-613, July.
    7. Albert Danso & Samuel Fosu & Samuel Owusu‐Agyei & Collins G. Ntim & Emmanuel Adegbite, 2021. "Capital structure revisited. Do crisis and competition matter in a Keiretsu corporate structure?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5073-5092, October.
    8. Mirza, Nawazish & Rahat, Birjees & Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2023. "Impact of Covid-19 on corporate solvency and possible policy responses in the EU," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 181-190.
    9. Bing Wang & Kung‐Cheng Ho & Xinyu Liu & Yan Gu, 2022. "Industry cash flow volatility and stock price crash risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 356-371, March.
    10. Xin Cui & Shouyu Yao & Zhenming Fang & Hua Wang, 2021. "Economic policy uncertainty exposure and earnings management: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3937-3976, September.
    11. Yang, Daecheon & Kim, Hyuntae, 2020. "Managerial overconfidence and manipulation of operating cash flow: Evidence from Korea✰," Finance Research Letters, Elsevier, vol. 32(C).

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    More about this item

    Keywords

    Capital structure; Cash flow volatility; Operating cash flow;
    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

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