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

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...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of finance (New York) 2010-04, Vol.65 (2), p.725-763
Main Authors: GATCHEV, VLADIMIR A., PULVINO, TODD, TARHAN, VEFA
Format: Article
Language:English
Subjects:
Capital expenditures
Capital investments
Capital markets
Cash
Cash flow
Coefficients
Corporate finance
Decision making
Dividends
Equity
Financial investments
Financial models
Financial theory
Flow coefficients
Investment policy
Long term debt
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2009.01549.x