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Essays on corporate capital structure and cash holdings
[Thesis]. Manchester, UK: The University of Manchester; 2012.
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Abstract
In this thesis, I examine several important aspects of firms’ financing processes in the G-5 countries consisting of France, Germany, Japan, the UK, and the US.First, I investigate the asymmetry in firms’ partial adjustments toward their target leverage, conditional on deviations from target leverage and financing gaps. Using the system Generalized Method of Moments, I show that the asymmetry in firms’ leverage adjustments are driven by differences in these factors. Firms adjust toward their target leverage faster when being over-levered and/or facing a financing deficit, a behavior in strong support of the dynamic trade-off theory of corporate leverage. Second, I examine whether firms’ choices of securities enable them to close out deviations from target leverage through asymmetric, logistic models that take into account both total costs of leverage adjustments (as proposed by the trade-off theory) and costs of adverse selection (as proposed by the pecking-order theory). The results suggest that even when firms’ choices of securities reflect their target adjustments as they allow them to move closer toward their target leverage, costs of adverse selection may still have some influence on these choices.Finally, I develop asymmetric, partial adjustment models to examine firms’ cash holdings adjustments. Consistent with the optimal cash holdings view, I find that firms have optimal levels of cash holdings and attempt to adjust toward these over time. Further, there is asymmetry in both their speeds and mechanisms of adjustments. Firms with above-target cash holdings adjust toward their targets faster than those with below-target cash holdings as their mechanisms of adjustments may involve relatively lower costs. They adjust mainly via changes in cash flows from financing and cash flows from investing while their counterparts adjust mainly via changes in cash flows from operating. I also document some evidence on the asymmetric impact of the magnitude of deviations from target cash holdings and factors which proxy for the levels of financial constraints on firms’ cash holdings adjustments and find that the impact of these proxies tends to be weaker than that of deviations from target cash holdings.