Abstract
Faced with cash flows that fall short of the sum of expected dividend and investment levels, firms must do one of the following: cut dividends, cut investment, or raise funds through security sales, asset sales or reductions in cash reserves. Our analysis indicates that while very few firms (6%) cut dividends, the majority (68%) make significant cuts in investment relative to expected levels. Investment cuts make up for approximately half of the shortfall, with the other half being covered primarily by debt financing. Net equity issues, reductions in cash balances and asset sales account for a trivial percentage of the shortfall. Our findings challenge several widely-held views in the corporate finance literature.
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