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Corporate liquidity and capital structure

Anderson, Ronald W. and Carverhill, Andrew (2012) Corporate liquidity and capital structure. Review of Financial Studies, 25 (3). pp. 797-837. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hhr103

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
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 03 Apr 2012 15:53
Last Modified: 24 May 2012 13:54
URI: http://eprints.lse.ac.uk/id/eprint/42953

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