The Influence of Cash Flow Volatility on Capital Structure and the Use of Debt of Different Maturities

49 Pages Posted: 23 Sep 2015 Last revised: 14 May 2016

See all articles by Michael O'Connor Keefe

Michael O'Connor Keefe

Victoria University of Wellington

Mona Yaghoubi

University of Canterbury

Date Written: September 22, 2015

Abstract

The empirical literature on the relationship between capital structure and firm cash flow volatility is inconclusive. We explore this relationship using several measures of a firm’s cash flow volatility and econometric methods that account for the non-linear relationship of proportional variables. Overall, our evidence indicates that ceteris paribus a one standard deviation increase from the mean of cash flow volatility implies an approximate 24% decrease in the long-term debt ratio, a 26% decrease in probability of holding debt with over 10 years to maturity, and a 39% increase in the probability of holding neither short nor long term debt.

Keywords: Capital structure, cash flow volatility, zero leverage, debt maturity

JEL Classification: G32

Suggested Citation

O'Connor Keefe, Michael and Yaghoubi, Mona, The Influence of Cash Flow Volatility on Capital Structure and the Use of Debt of Different Maturities (September 22, 2015). Journal of Corporate Finance, Vol. 38, 2016, Available at SSRN: https://ssrn.com/abstract=2664282 or http://dx.doi.org/10.2139/ssrn.2664282

Michael O'Connor Keefe (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Mona Yaghoubi

University of Canterbury ( email )

Private Bag 4800
Christchurch, 8140
New Zealand
02102689100 (Phone)

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