Read the text Corporate Cash Shortfalls And Financing Decisions And...

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Read the text Corporate Cash Shortfalls And Financing Decisions And comment on the following questions:
1. Using Cash ex post, immediate cash squeezes are the primary trigger for both debt and equity issuances. Firms that are running out of cash at the end of year t are 11 times more likely to issue debt in year t than firms that are not (69.8% vs. 6.3%) after controlling for other variables. The likelihoods of equity issuance by firms that are running out of cash in year t and firms that are not differ by a factor of four, at 24.5% and 6.1%, respectively. Using an ex post measure, near-future cash needs are also important, but less important than immediate cash needs in predicting securities issuance (page 8).
2. Welch (2004, p. 107) states that “corporate issuing motives themselves remain largely a mystery.” In this paper, we show that a cash squeeze is the primary reason that U.S. firms raise cash externally, as predicted by the pecking order theory.
3. Firms almost never borrow unless they will spend the money immediately. Equity issues are less frequent than debt issues, but when firms do issue equity they frequently raise enough to fund both immediate needs and needs for the next year or two. In explaining the choice between debt and equity financing, both economic fundamentals and market timing proxies are important, even for firms that are running out of cash (page 37).
4. Since the cash flow information is only available from 1971, our final sample starts from 1972. Since we also examine stock returns in the three years after each financing decision, our sample period ends at 2010. We also drop firm-year observations for which frequently used variables in our paper have a missing value, the net sales is not positive, the book value of assets at the end of fiscal year t-1 or t is less than $10 million (expressed in terms of purchasing power at the end of 2010), the book value of assets at the end of year t-2 is missing, the cash flow identity is violated in t and t-1, or there is a major merger in t.

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1. I do not completely agree with this statement. Organizations are going concern entities and they tend to plan their cash flow needs well in advance to ensure that they are adequately financed. In such a situation, why would near-future cash needs be less important than immediate cash needs? Every year budgets are made to make predictions about the future needs of cash by the business. This helps to avoid cash crunch at the last minute. Don’t organizations maintain buffer cash balance so that they are able to meet any unexpected cash expenses? If there is immediate cash need, wouldn’t this indicate that the company is facing liquidity problems? In such a situation, why would any debt holder advance debt or any equity provider invest in the company? Debt providers would be concerned that the company is not having sufficient liquidity to cover its daily expenses and thus the probability of defaulting on the debt servicing payments would also be very high. Even if the company is able to raise debt to meet any urgent need, the debt would come at high cost since the debt provider would expect...

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