Prior work on leverage implicitly assumes capital availability depends solely on firm characteristics. However, market frictions that make capital structure relevant may also be associated with a firm’s source of capital. Examining this intuition, we find firms that have access to the public bond markets, as measured by having a debt rating, have significantly more leverage. Although firms with a rating are fundamen-tally different, these differences do not explain our findings. Even after controlling for firm characteristics that determine observed capital structure, and instrumenting for the possible endogeneity of having a rating, firms with access have 35 % more debt. Under the tradeoff theory of capital structure, firms determine their preferred leverage ratio by calculating the tax advantages, costs of financial distress, mispricing, and incentive effects of debt versus equity. The empirical literature has searched for evidence that firms choose their capital structure, as this theory predicts, by estimating firm leverage as a function of firm characteristics. Firms for whom the tax shields of debt are greater, the costs of financial distress lower, and the mispricing of debt relative to equity more favorable are expected to be more highly levered. When these firms discover that the net benefit of debt is positive, they will move toward their preferred capital structure by issuing additional debt and/or reducing their equity. The implicit assumption has been that a firm’s leverage is completely a function of a firm’s demand for debt. In

The average cash to assets ratio for U.S. industrial firms increases by 129 % from 1980 to 2004. Because of this increase in the average cash ratio, firms at the end of the sample period can pay back all of their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, but is more pronounced for firms that do not pay dividends. The average cash ratio increases over the sample period because firms change: their cash flow becomes riskier, they hold fewer inventories and accounts receivable, and are increasingly R&D intensive. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio. Considerable media attention has been devoted to the increase in cash holdings of U.S. firms. For instance, a recent article in the Wall Street Journal states that “The piles of cash and stockpile of repurchased shares at [big U.S. companies] have hit record levels”. 1 In this paper, we investigate how the cash holdings of American firms have evolved since 1980 and whether existing models of cash holdings help explain this evolution. We find that there is a secular increase in the cash holdings of the typical firm from 1980-2004. In a regression of the average cash-to-assets ratio on a constant and time, time has a

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to defined benefit pension plans, even when controlling for correlations between the pension funding status itself and the firm’s unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.

We survey 1,050 Chief Financial Officers (CFOs) in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations. We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86 % of constrained U.S. CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008. More than half of the respondents said they canceled or postponed their planned investments. Our results also hold in Europe and Asia, and in many cases are stronger in those economies. Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior.

In this paper, we investigate how corporate governance impacts firm value by examining both the value and the use of cash holdings in poorly and well governed firms. Cash represents a large and growing fraction of corporate assets and generally is at the discretion of management. We use several measures of corporate governance and show that governance has a substantial impact on firm value through its impact on cash: $1.00 of cash in a poorly governed firm is valued by the market at only $0.42 to $0.88, depending on the measure of governance. Good governance approximately doubles this value of cash. Furthermore, governance has a significant impact on how firms use cash. We show that firms with poor corporate governance dissipate cash quickly and in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed. All of our results hold after controlling for the level of acquisitions undertaken by cash rich firms, indicating that acquisitions are not solely responsible for the value destruction in poorly governed, cash rich firms. The findings presented in this paper provide direct evidence of how governance can improve or destroy firm value and insight into the importance of

We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows financially constrained firms to hedge against future income shortfalls, reducing debt – “saving borrowing capacity ” – is a more effective way of securing future investment in high cash flow states. This trade-off implies that constrained firms will allocate excess cash flows into cash holdings if their hedging needs are high (i.e., if the correlation between operating cash flows and investment opportunities is low). However, constrained firms will use excess cash flows to reduce current debt if their hedging needs are low. The empirical examination of cash and debt policies of a large sample of constrained and unconstrained firms reveals evidence that is consistent with our theory. In particular, our evidence shows that financially constrained firms with high hedging needs have a strong propensity to save cash out of cash flows, while showing no propensity to reduce outstanding debt. In contrast, constrained firms with low hedging needs systematically channel free cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt.

As liquidity became scarce and internal profits plunged, many firms were forced to rely on bank lines of credit during the 2008-9 financial crisis. Surprisingly, little is known about these credit facilities in general, let alone about their importance during a crisis. This paper investigates a unique dataset that describes how public and private firms in the U.S. and abroad use lines of credit during early 2009. Our analysis emphasizes the interaction between internal funds, external funds, and real decisions such as corporate investment and employment. Among other things, we find that firms that are “credit constrained ” (small, private, noninvestment grade, and unprofitable) have larger credit lines (as a proportion of assets) than their large, public, investment-grade, profitable counterparts both before and during the crisis. Constrained firms draw more funds from their credit lines and are more likely to face difficulties in renewing or initiating new lines during the crisis. The terms of credit lines facilities changed significantly with the crisis: maturities declined; and commitment fees and interest spreads went up for all firms, but particularly for constrained firms. Our evidence suggests that while being profitable helps firms establish credit lines, it does not monotonically lead to increased use. Instead, lines of credit are used when internal funds (cash stocks and cash flows) decline. Looking at real-side decisions, our estimates suggest that lines of credit provide the liquidity “edge ” firms need to invest during the crisis. Key words: Financial crisis, investment spending, liquidity management, lines of credit, financial constraints. JEL classification: G31. *We thank James Choi and Jean Helwege for their suggestions. We also benefited from comments from seminar participants at the University of Amsterdam and at the RFS/Yale Financial Crisis Conference. We thank CFO magazine for helping us conduct the survey, though we note that our analysis and conclusions do not necessarily reflect those of CFO. We thank Benjamin Ee for excellent

We test whether executive stock ownership affects firm payouts using the 2003 divi-dend tax cut to identify an exogenous change in the after-tax value of dividends. We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut sug-gests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts. SHAREHOLDER PAYOUTS HAVE CHANGED DRAMATICALLY over the past two decades, with dividend payout ratios falling substantially and share repurchases increasing rapidly (Fama and French (2001), Grullon and Michaely (2002)). Following the dividend tax cut in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of May 2003, however, dividend activity increased sharply, particularly the number of dividend initiations (e.g., Blouin, Raedy, and Shackelford (2004),

What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggre-gate investment. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993–2007 period, the representative US corporation invests $0.06 out of each $1 of collateral. (JEL D22, G31, R30) In the presence of contract incompleteness, Barro (1976), Stiglitz and Weiss (1981), and Hart and Moore (1994) point out that collateral pledging enhances a firm’s financial capacity. Providing outside investors with the option to liquidate pledged assets ex post acts as a strong disciplining device on borrowers. This, in turn, eases financing ex ante. Asset liquidation values thus play a key role in the determination of a firm’s debt capacity. This simple observation has important mac-

We use the August 2007 crisis episode to gauge the causal effect of financial contracting on real firm behavior. We identify heterogeneity in financial contracting at the onset of the crisis by exploiting ex-ante variation in long-term debt maturity structure. Using a difference-in-differences matching estimator approach, we find that firms whose long-term debt was largely maturing right after the third quarter of 2007 cut their investment-to-capital ratio by 2.5 percentage points more (on a quarterly basis) than otherwise similar firms whose debt was scheduled to mature after 2008. This drop in investment is statistically and economically significant, representing a drop of one-third of pre-crisis investment levels. A number of falsification and placebo tests suggest that our inferences are not confounded with other factors. For example, in the absence of a credit contraction, the maturity composition of long-term debt has no effect on investment. Moreover, long-term debt maturity composition had no impact on investment during the crisis for firms for which long-term debt was not a major source of funding. Our analysis highlights the importance of debt maturity for corporate financial policy. More than reporting evidence of a general association between credit markets and real activity, our analysis shows how the credit channel operates through a specific feature of financial contracting.