Cash Management and Capital Structure

There is a vast majority of research papers focusing on the relationship between cash management and choice of capital structure of the firm, discussing different issues in corporate finance. This paper narrows the research to the most relevant topic upon this issue, which is the zero- or ultra-low leverage (<1%) puzzle. It was found that the ultra-low leveraged U.S. firms hold high cash reserves and are smaller in size relatively to other companies. It was also shown that ultra-low leverage is persistent in time, implying that a firm is likely to have low leverage if it had low leverage in the previous year. Moreover, some theories describing the optimal decision in capital structuring were tested. In particular, credit rationing hypothesis (Stiglitz, J.E., Weiss, A., 1981) and underinvestment hypotheses (Myers, 1977) were not rejected, whereas some evidence against pecking order theory (Myers & Majluf, 1984) was found.