Firm dynamics depend on cash and capital

We study how costly financing and bankruptcy interact with a firm's cash and capital to determine optimal investment, payout, issuance, and default. The dynamic model connects disperse strands of the empirical literature, and we find support in the data for novel non-linearities: (1) equity issuance scaled by capital is declining and convex in capital and (2) payout scaled by capital is concave in capital. Accounting for these predictions in prior studies increases explanatory power and alters results. We prove uniqueness of the model solution by proving a comparison theorem for discontinuous viscosity solutions.