The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities

    Authors

    V. A. Gatchev; T. Pulvino;V. Tarhan

    Comments

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    Abbreviated Journal Title

    J. Financ.

    Keywords

    RESEARCH-AND-DEVELOPMENT; CORPORATE-INVESTMENT; STOCK RETURNS; CONSTRAINTS; LIQUIDITY; EQUITY; MODEL; DEBT; BANKRUPTCY; DYNAMICS; Business, Finance; Economics

    Abstract

    We develop a dynamic multiequation model where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash. We argue that static models of financial decisions produce inconsistent coefficient estimates, and that models that do not acknowledge the interdependence among decision variables produce inefficient estimates and provide an incomplete and potentially misleading view of financial behavior. We use our model to examine whether firms are constrained from accessing capital markets. Unlike static single-equation studies that find firms underinvest given cash flow shortfalls, we conclude that firms maintain investment by borrowing.

    Journal Title

    Journal of Finance

    Volume

    65

    Issue/Number

    2

    Publication Date

    1-1-2010

    Document Type

    Article

    Language

    English

    First Page

    725

    Last Page

    763

    WOS Identifier

    WOS:000275761900009

    ISSN

    0022-1082

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