Nathalie Moyen

Corporate Cash Holdings and Credit Line Usage

We investigate the factors driving the unprecedented rise in corporate liquidities since the 1970s. We find that an economy‐wide reduction in the cost of holding liquidities and an increase in risk best explain the rise in cash holdings and the widespread use of credit lines. The structural estimation results shed light on two widely acknowledged motives for holding cash. The precautionary motive and the liquidity motive translate risk exposure into cash holdings. Our results, however, do not suggest that firms have become more prudent over time. It is higher liquidity needs that has forced firms to hold more cash and use more credit lines.

Investment Distortions Caused by Debt Financing

The presence of debt in a firms capital structure may induce equity claimants to choose an investment policy that is not in the best interest of all claimants. Since Myers (1977) and Jensen and Meckling (1976), the debt overhang and asset substitution investment distortions are well recognized. However, the previous literature did not reach a consensus as to the magnitude of such costs. This paper re-examines the debt overhang problem, but in a framework where the firm is allowed to recapitalize at any point in time and where the investment level rather than the binary operating policy is used to measure the size of the underinvestment caused by debt financing. The debt overhang problem is shown to do little harm to equity claimants. In bad economic conditions when the marginal productivity of capital is low, equity claimants actually benefit from the underinvestment. They only suffer in better economic conditions.