Cash Demand and Financing Decisions

Abstract

Recent literature starts to focus on the effects of the urgency of cash demand on the choice of financing sources. Extant studies use data from the U.S. and conclude that firms use debt financing to meet immediate cash demand and equity financing to meet longer-term cash demand. Using data from China, this paper uncovers opposite findings: Firms are more likely to use equity financing to meet immediate cash demand and debt financing to meet cash demand in longer terms. We discuss the possible mechanisms behind the pattern.