Corporate Cash Shortfalls and Financing Decisions Rongbing Huang and Jay R. Ritter
The Review of Financial Studies Vol. 34, Issue 4 (April) 2021, pp. 1789-1833
Overview Firms may raise external capital to fund investment and operations, rebalance capital structures, or increase cash balances. In this paper, we find that US firms’ external financing decisions from 1972 to 2013 were primarily motivated by near- term cash shortfalls, and the choice of financing instrument was determined by how persistent the cash shortfalls were and what the issuance proceeds would be used for. Given their actual revenue and spending, most net equity issuers and an overwhelming majority of net debt issuers would have faced immediate cash depletion without external financing. In contrast, moving towards a stationary target capital structure and pure cash stockpiling appeared to be second-order considerations for most companies. We also examine the proportion of issuance proceeds retained as cash. On average, debt issuers immediately spent almost all of the proceeds, while equity issuers retained a good deal in cash. Anticipated near-future cash needs and the fixed costs of financing help to explain the fraction of proceeds retained. Our findings suggest that, when making financing decisions, most firms are primarily concerned about the opportunity costs of failing to meet cash needs. A funding-horizon theory that optimizes both security issuance and capital structure to meet immediate and future funding needs best describes observed capital structures.
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