Leverage and Cash Dynamics

This paper documents new and empirically important interactions between cash-balance leverage dynamics. Cash ratios typically vary widely over extended horizons, with dynamics remarkably similar to (and complementary with) those of capital structure. Leverage cash interact approximately as predicted by the internal-versus-external funding regimes in Myers Majluf (1984). is quite volatile when are stable vice-versa, while net-debt almost always volatile. Most firms increase sharply balances (internal funds) become scarce. Capital structure models that extend Hennessy Whited (2005) include explain some, but not all, aspects observed relation squeezes increases.