We analyze capital structure decisions of U.S. firms during 1905-1924, a period characterized by two shocks that provide a unique experiment for studying the primary determinants of financing choices: (i) the introduction of corporate and individual taxes, and (ii) the onset of World War I,...

Previous studies report that cash holdings are more valuable for financially constrained firms than for unconstrained firms. We examine (i) why this is so and (ii) why some constrained firms appear to hold too little cash. Our results indicate that greater cash holdings are associated with...