Dpto. Economía y Empresa

This paper explores the external financing–cash flow relationship in capital structure theory by comparing unlisted (financially constrained) and listed (financially unconstrained) companies. We postulate that investment is determined endogenously in the case of unlisted firms, as they are strongly dependent on internally generated funds (cash flow). Consequently, unlisted firms invest their cash flow in profitable projects, using any residual cash flow to increase their holdings of safe assets. In turn, listed companies determine their investment exogenously and may reduce leverage if they raise an excess of cash flow. As a result, listed companies would react more negatively to shocks in cash flow. Our findings reveal that both unlisted and listed companies show a negative external financing–cash flow relationship, that of the latter being clearly more intense.

Our evidence suggests that Spanish public firms adjust slowly toward their capital structure target, with the typical firm closing approximately one-fifth of the gap between its current and target debt ratios each year. This finding is in contrast with previous evidence; however, we employ econometric techniques specially designed for highly persistent dependent variables, like market debt ratios. Moreover, our evidence does not seem to indicate that macroeconomic conditions, at least under the conditions experienced by the Spanish economy during our sample period, affect the speed of adjustment. If anything, our results are consistent with faster adjustments during economic states in which the distance between the current and target leverage is the greatest.

We analyze the relevance of adjustment costs in keeping Spanish public firms away from their target leverage. We argue that firm's cash flow outcomes determine the importance of the adjustment costs on capital structure changes. Then, we estimate capital structure adjustment speeds across three different cash flow realizations. We report that during years in which either over-levered or under-levered Spanish public firms make changes in their financing decisions, as a result of their high cash flow realizations, they close significantly more of the gap between current and target capital structure than those firms with intermediate and low cash flow observations. Moreover, independently of the cash flow level, we find that leverage adjusts more quickly for over-levered than for under-levered firms.

This article explores the cash–cash flow relationship by comparing financially constrained and financially unconstrained companies. Unlike previous research, we test the sensitivity of cash to cash flow by considering unlisted firms as constrained and listed firms as unconstrained. Our empirical evidence is based on findings from Spanish firms and is consistent with the core rationale that unlisted firms face more difficulties than their listed counterparts when looking for funding from external markets. As a result, unlisted firms tend to hoard significant amounts of cash out of the generated cash flow, while listed firms do not. Our findings are robust to a number of additional empirical tests.

The potentially important impact of taxation on corporate financing decisions is widely recognized despite the fact that the empirical evidence is far from conclusive. In this study, we assess the debt tax benefits of Spanish listed firms throughout the period 2007-2013. Specifically, using a simulation approach, we found the capitalized value of gross interest deductions amounts to approximately 6.4% of firms’ market value, while the net debt benefit (of personal taxes) is estimated at 2.1%, in contrast to the traditional 11.4% (i.e. marginal tax rate times debt). Conversely, the panel data regression approach reveals a 13.6% (34.2%) debt tax shield in terms of firm (debt) value. This evidence supports the view that taxes influence corporate decision-making and that debt makes a reasonable contribution to firm value.