The matching principle states that a firms short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds.

What do you think of the evidence reported in Grundy and Verwijmeren (2019) with respect to the matching principle? Are the results in line with the matching principle? Discuss briefly.

Abstract

Investment characteristics and the form of external financing are linked. Factor analysis indicates that the principal determinant of the financing choice is whether an investments payoffs can be described as a hit or miss. Hit-or-miss investments are more likely to be equity financed. Equity also becomes more common the longer the time until an investment produces positive payoffs. Debt financing is more likely for investments that are both tangible and nonunique. For R&D-like investments, equity and bank debt financing are more likely than nonbank debt financing. Convertible securities link to uncertain investment lives and are therefore useful for sequential financing.