We analyze a continuous-time model in which shareholders can adjust both debt and cash without commitment. We derive a closed-form solution for leverage adjustments, payout policies, and security prices. Consistent with empirical evidence, we find that 1) despite the presence of the “leverage ratchets,” a cash-rich firm frequently deleverages from its historical peak to low levels, while accumulating large liquid reserves; 2) a cash-strapped firm tends to issue new bonds as liquidity needs arise over time. We also provide testable implications regarding payout policy and the volatility of bond returns.