How Cash Flow Volatility Affects Debt Financing and Accounts Payable

Abstract

This paper investigates how volatility of cash flow from operations affects debt financing and accounts payable using a sample of Italian listed firms. Firms with different levels of cash flow were also examined. We find that firms that have more cash flow volatility have lower long-term debt to total debt, whatever the average level of their cash flow. We also show that accounts payable is positively associated with cash flow volatility, in particular for firms with a higher level of cash flow. Lastly, research findings reveal that firm leverage as measured by the total debt to assets ratio is negatively associated with cash flow volatility when firms have a lower level of cash flow, while the same relationship was not found for firms with a higher cash flow level.

Stock return volatility and capital structure measures of nonfinancial firms in a dynamic panel model: Evidence from Pakistan

“…This variation in cash flows affects the earnings of the firm and decreases the firm's ability in meeting their debt obligations. Further, Santosuosso (2015) supports the evidence that high volatility of cash flow is negatively associated with long-term debt and total debt ratios. It is measured as standard deviation of cash flows, and firms bearing high cash flow volatility can reduce their financial distress cost through the reduction of debt from capital structure (Frank & Goyal, 2009).…”

“…Consistent with this, Colla, Ippolito, and Wagner (2012) explore that cash flow volatility has a notable and negative impact on total leverage and senior leverage. Further, Santosuosso (2015) supports the evidence that high volatility of cash flow is negatively associated with long-term debt and total debt ratios. Consistent with the above arguments, Dudley and James (2015) use cash flow volatility as a novel measure and find that cash flow volatility is a substance of financially constrained firms.…”

“…Results related to those alternative measures are reported in Table 9. Therefore, firms reduce the leverage ratios from capital structure for smooth operations of business when facing the issues related to cash flow volatility (Akhtar, 2012;Dudley & James, 2015;Keefe & Yaghoubi, 2016;Santosuosso, 2015). This dynamic capital structure model follows the optimal capital structure assumptions with mean reversion behaviour.…”

“…Cash flow volatility is costly as it affects a firm's investment policy by increasing both the likelihood of default and the costs of raising external capital. Therefore, firms reduce the leverage ratios from capital structure for smooth operations of business when facing the issues related to cash flow volatility (Akhtar, 2012;Dudley & James, 2015;Keefe & Yaghoubi, 2016;Santosuosso, 2015).…”

Corporate dynamism and cash holding decision in listed manufacturing firms in Nigeria

“…There has been a dichotomy in theories; Santosuosso (2015) noted that the pecking order theory assumes that agent (managers) act in the best interest of their principal (shareholders). It's believed that the agency conflict (conflict of interest) is absent under this theory.…”