| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP211021 |
| Author Name | : Nitya Nand Tripathi and Naseem Ahamed |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 12 |
The paper examines the relationship between Operating Cash Flow (OCF) volatility and debt usage in the capital structure of firms. Using the model used by Bates et al. (2009) and Frank and Goyal (2009) on a sample of 22,798 firm-years data points, we found that there is an inverse relationship between the debt component of capital structure and OCF. We also found a positive relationship between total debt (adjusted for total market value of the firm) and volatility of the OCF both in the full sample and the two highest quartiles. An increase of one standard deviation in OCF volatility causes a 5% increase in total debt in the capital structure. Hence, increase in OCF volatility of a firm leads to increased borrowing. The paper is probably the first to examine the relationship between OCF volatility and debt proportion of the capital structure in the Indian context.
Despite the existence of literature on the theoretical relationship between cash flow volatility and financial leverage of firms, there is little empirical evidence towards the same. The studies on Asian corporations are even less and most of those studies support various explanations on financing decisions previously established in the developed markets (Getzmann et al., 2014). In this paper, we discuss two contemporary trends in designing capital structure of the Indian firms. First, we found approximately 20.87% firm-years with negative cash flow in Indian firms (Refer Figure 1 for quarterly ratio of Operating Cash Flow (OCF) to Total Assets) as against the findings of Ritter and Welch (2002), Fama and French (2004) and Denis and McKeon (2018) that document that there are a large number of firms with negative cash flow globally. Second, we found that OCF volatility ranged between