Anderson, Ronald W. and Carverhill, Andrew (2012) Corporate liquidity and capital structure. Review of Financial Studies, 25 (3). pp. 797-837. ISSN 0893-9454
Abstract
We solve for a firm's optimal cash holding policy within a continuous time, contingent claims framework using dividends, short-term borrowing, and equity issues as controls assuming mean reversion of earnings. Optimal cash is non-monotone in business conditions and increasing in the level of long-term debt. The model matches closely a wide range of empirical benchmarks and predicts cash and leverage dynamics in line with the empirical literature. Firm value is quite insensitive to changes in the level of long-term debt. The model has interesting implications for asset substitution, hedging, and pecking order. Growth opportunities do not greatly affect cash holding policy.
| Item Type: | Article |
|---|---|
| Official URL: | http://rfs.oxfordjournals.org/ |
| Additional Information: | © 2011 The Author |
| Library of Congress subject classification: | H Social Sciences > HG Finance |
| Sets: | Departments > Finance |
| Date Deposited: | 03 Apr 2012 15:53 |
| URL: | http://eprints.lse.ac.uk/42953/ |
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