The influence of cash flow volatility on firm use of debt of different maturities or zero-debt: International evidence

Abstract

The empirical international literature on the relationship between firm cash flow volatility and debt maturity and zero-debt policy provides contradictory evidence. Using a large international sample, we find that cash flow volatility is positively associated with our measure of debt maturity at less than the 1% level of significance. Relative to unconditional means of debt maturity, a one standard deviation increase in cash flow volatility implies a 2.57% decrease in the probability of firms using long-term debt, a 5.83% increase in the probability of firms using only short-term debt and an 11.8% increase in the probability of firms using zero-debt. Overall, our results support the screening and the trade-off theories that firms with high cash flow volatility are screened out of the long-term debt market.