Title

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

Authors

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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