Corporate Financial Policy: What Really Matters?

34 Pages Posted: 9 Mar 2021 Last revised: 23 Mar 2021

See all articles by Harry DeAngelo

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: March 1, 2021

Abstract

Reliable access to funding, as in Myers and Majluf (1984), is what really matters, but there are nontrivial indeterminacies in how such access is arranged and in the debt, cash-balance, and payout components of financial policy. These inferences are from a corporate “twins” comparison study of the financial policies of Henry Ford at Ford Motor Co. and Alfred P. Sloan, Jr. at General Motors Corp. The documented testimony of Ford and Sloan indicates that both focused on funding their business, with debt as a funding tool, not an element of an optimized leverage ratio. Their financial policies differ in five important respects, including (i) the use of debt versus large cash balances to meet funding needs and (ii) a commitment to paying large dividends versus a strong aversion to payouts. The data also point to the importance of the inability of managers to identify optimal policies with reliable precision.

Keywords: capital structure, payout policy, cash balances, corporate financial policy

JEL Classification: G32, G35

Suggested Citation

DeAngelo, Harry, Corporate Financial Policy: What Really Matters? (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3800092 or http://dx.doi.org/10.2139/ssrn.3800092

Harry DeAngelo (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

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