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How Do Firms Finance Large Cash Flow Requirements?

Author

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  • Colin Mayer
  • CZhangkai Huang

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.

Suggested Citation

  • Colin Mayer & CZhangkai Huang, 2008. "How Do Firms Finance Large Cash Flow Requirements?," Economics Series Working Papers 2008fe06, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2008fe06
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    File URL: https://ora.ox.ac.uk/objects/uuid:594603c5-6b89-4f35-9476-0aa95ecc393a
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    Cited by:

    1. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2011. "Do Phoenix miracles exist ? firm-level evidence from financial crises," Policy Research Working Paper Series 5799, The World Bank.
    2. Jena, Pratap Ranjan, 2017. "Indian Variant of MTEF: The Scope and Opportunities to Develop an Effective Budget Planning Process," Working Papers 17/185, National Institute of Public Finance and Policy.
    3. Casu, Barbara & Girardone, Claudia, 2010. "Integration and efficiency convergence in EU banking markets," Omega, Elsevier, vol. 38(5), pages 260-267, October.

    More about this item

    Keywords

    Cash Flow Shocks; Equity Issues; Trade-Off Theory; Pecking-Order Theory;
    All these keywords.

    JEL classification:

    • 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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