Financing a Loss

By examining only firms that experience net losses and negative cash flows, we are able to analyze a sample of firms that face a discrete refinancing point with no internal equity available, as well as a liquidity mismatch between assets and liabilities. These unique characteristics of our sample allow us to draw conclusions concerning a wide range of corporate financial decisions covering capital structure, dividend policy, and working capital management. We document that widespread changes in leverage are driven mainly by the decline in the book value of equity that occurs with a loss and are consistent with both the pecking order and the static trade-off models. Managers are reluctant to cut dividends, even when faced with seemingly high opportunity costs that sacrifice future productivity. Last, a firm's liquidity position is managed by shifts between current asset items, as well as an overall change in net working capital