Corporate financing decisions under ambiguity: pecking order and liquidity policy implications

This paper addresses the following unresolved questions fromthe perspective of ambiguity theory: Why do some firms issue equity instead of debt?Why did most firms retain their cash holdings instead of distributing themas dividends in recent times? How do firms change their financing policies during a period of severe financial constraints and ambiguity, orwhen facing the threat of an unpredictable financial crisis? We analyze how the values of the firm's equity and debt are affected by ambiguity. Wealso showthat cash holdings are retained longer if the investors' ambiguity aversion bias is sufficiently large,while cash holdings become less attractivewhen the combined impact of ambiguity and ambiguity aversion is relatively low.