Abstract
We study the simultaneous choice of investment, debt financing and liquidity for a large sample of US corporates between 1980 and 2014. We partition the sample according to the firms' financial constraints and their needs to hedge against future shortfalls in operating income. In contrast to results derived from isolated analyses of individual corporate decisions, our joint estimation approach shows that cash flow sensitivities of investment, net debt issuance and cash holdings are much higher for unconstrained firms than for constrained firms. Companies with high hedging needs moreover manage their ability to cover future financing needs in different ways: While unconstrained firms increase their debt issues with improving investment opportunities, constrained firms drive up their cash stocks to preserve financial flexibility. Even though the financial crisis erupting in 2007 greatly reduced the size of the cash flow sensitivities of corporate investment, financing and liquidity decisions, it left these general relations intact.
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