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This paper investigates the dynamic interactions of firms' financial behaviours using a five-variable structural vector autoregression (SVAR) framework. We provide empirical evidence that firms' financial behaviours are jointly determined. We demonstrate that a single-equation analysis on one financial behaviour generates biased estimates. We find that firms deviate from the desired level of each financial characteristic to absorb shocks to the other financial characteristics. Following such deviations, the characteristics revert in subsequent periods. Among these inter-related financial behaviours, equity decisions are the most independent, followed by dividend target, investment, and leverage target. Although firms prioritize financial behaviours differently, it appears that there is neither one financial behaviour that firms use only to absorb shocks nor one that never responds to the others.
•We examine interactions of firm financial behaviours using a five-variable SVAR framework.•Firm financial behaviours are jointly determined rather than independent.•The ranking of priority is equity, dividend, investment and leverage.•Firms deviate from targets to absorb shocks to the other financial characteristics.•These deviations are followed by a reversion in subsequent periods.