| dc.description.abstract | This paper investigates whether time-series variation in leverage can be linked to
hypothetical cash-balance squeezes for Nordic firms. The methodology in this paper
is based on the article by DeAngelo, H., Concalves, A. S., & Stulz, A. S. (2022). We
uncover that high time-series variation in leverage and cash-balance ratios is the norm
for firms facing hypothetical cash squeezes in the period January 2000 to December 2021.
Capital expenditures are found to be the main users of funds and the primary driver of
time-series variation in leverage ratios.
Overall, we document an empirical link between leverage and cash-balance dynamics.
Over extended time periods, cash ratios display wide variations that closely resemble and
complement the dynamics of capital structure. The interactions between leverage and
cash dynamics align with the predictions of the internal-versus-external funding regime
outlined in Myers & Majluf (1984). When cash ratios remain stable, leverage tends to be
highly volatile, and vice versa. Net-debt ratios are almost always volatile. As internal
funds (cash balances) become scarce, most firms significantly increase their leverage. The
latter is especially true for firms delisted due to bankruptcy or liquidation.
In sum, we report that there exists an interaction between leverage and cash balances.
Consequently, researchers and companies should start to consider the two financial items
as co-dependent rather than univariate variables. The research in this paper is placed
in the intersection between the research fields of capital structures and cash balances,
providing valuable insights to the small research field of leverage and cash dynamics. | en_US |
