The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities

67 Pages Posted: 14 Mar 2006 Last revised: 6 Jul 2009

See all articles by Vladimir A. Gatchev

Vladimir A. Gatchev

University of Central Florida - Department of Finance

Todd C. Pulvino

AQR Capital Management, LLC; CNH Partners

Vefa Tarhan

Loyola University of Chicago - School of Business Administration; Northwestern University - Kellogg Graduate School of Management

Date Written: July 3, 2009

Abstract

We develop a dynamic multi-equation model where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash. We argue that static models of financial decisions produce inconsistent coefficient estimates and that models that do not acknowledge the interdependence among decision variables produce inefficient estimates and provide an incomplete and potentially misleading view of financial behavior. We use our model to examine whether firms are constrained from accessing capital markets. Unlike static single-equation studies which find that firms underinvest when faced with cash flow shortfalls, we conclude that firms maintain investment by borrowing.

Keywords: Casflow sensitivty, investment and financing decisions, capital market access constraints

JEL Classification: G31, G32, G30

Suggested Citation

Gatchev, Vladimir A. and Pulvino, Todd C. and Tarhan, Vefa, The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities (July 3, 2009). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=890706 or http://dx.doi.org/10.2139/ssrn.890706

Vladimir A. Gatchev

University of Central Florida - Department of Finance ( email )

Orlando, FL 32816-1400
United States
(407) 823-3694 (Phone)
(407) 823-6676 (Fax)

HOME PAGE: http://www.bus.ucf.edu/vgatchev/

Todd C. Pulvino

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

CNH Partners ( email )

2 Greenwich Plaza
1st Floor
Greenwich, CT 06830
United States
203-742-3002 (Phone)
203-742-3072 (Fax)

Vefa Tarhan (Contact Author)

Loyola University of Chicago - School of Business Administration ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States

Northwestern University - Kellogg Graduate School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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