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Corporate Debt and Liquidity

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Seaport B
Hosted By: American Finance Association
  • Chair: Michael Roberts, University of Pennsylvania

Corporate Cash and Political Uncertainty

Candace Jens
,
Tulane University
Beau Page
,
Tulane University

Abstract

How does political uncertainty affect firms’ cash saving behavior? We show theoretically that uncertainty causes firms to build up cash balances in advance of the uncertain event, then draw down the balances afterwards. Using gubernatorial elections as an exogenous source of uncertainty, we find empirical support for our predictions. Firms save an extra quarter’s worth of cash before high-uncertainty quarters and draw down balances after uncertainty resolves. Political uncertainty affects savings far more than payout because firms that save the most pre-election rarely engage in payout. Rather, these firms save by adjusting the number and magnitude of pre-election equity issuances.

Rollover Risk and the Dynamics of Debt

Maria Chaderina
,
University of Oregon

Abstract

I study how firms adjust leverage, maturity and cash to manage rollover risk, and show that time-variation in concentration of maturity dates arises endogenously. To avoid rollover risk, firms prefer long-term debt with dispersed maturity dates. However, severe negative shocks force firms to borrow above an optimal level. They issue short-term debt as a commitment to delever in the next period. This concentrates maturity dates in the next period. The calibrated version of the model matches several empirical facts: more profitable firms have high leverage, use longer maturity bonds and stagger their maturity dates.

The Impact of Labor Market Frictions on Corporate Liquidity Management

Jack Favilukis
,
University of British Columbia
Xiaoji Lin
,
University of Minnesota
Neng Wang
,
Columbia University
Xiaofei Zhao
,
Georgetown University

Abstract

We show that labor market frictions are first-order for understanding corporate liquidity management. A model with labor market frictions and liquidity management implies strong links between labor variables and cash holding policies. In particular, labor share is positively while wage growth is negatively associated with firms' investment in cash balances. This is because pre-committed wage payments to labor make cash savings more valuable to firms in future states where financing constraints are tightened. A model without wage rigidity does not quantitatively imply these predictions. Empirically, we show that wage growth negatively while labor share positively forecast corporate cash holding policies in a cross-section of international firms, consistent with the model predictions. Furthermore, the links between labor variables and cash policies are stronger for firms with higher wage rigidity.
Discussant(s)
Heitor Almeida
,
University of Illinois
Zhiguo He
,
University of Chicago
Toni Whited
,
University of Michigan
JEL Classifications
  • G3 - Corporate Finance and Governance