Market Timing, Investment, and Risk Management

Patrick Bolton, Hui Chen () and Neng Wang

No 16808, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Firms face uncertain financing conditions and are exposed to the risk of a sudden rise in financing costs during financial crises. We develop a tractable model of dynamic corporate financial management (cash accumulation, investment, equity issuance, risk management, and payout policies) for a financially constrained firm facing time-varying external financing costs. Firms value financial slack and build cash reserves to mitigate financial constraints. However, uncertainty about future financing opportunities also induce firms to rationally time the equity market, even if they have no immediate needs for cash. The stochastic financing conditions have rich implications for investment and risk management: (1) investment can be decreasing in financial slack; (2) firms may invest less as expected future financing costs fall; (3) investment-cash sensitivity, marginal value of cash, and firm's risk premium can all be non-monotonic in cash holdings; (4) speculation (as opposed to hedging) can be value-maximizing for financially constrained firms.

JEL-codes: E22 G01 G12 G3 (search for similar items in EconPapers)
Date: 2011-02
New Economics Papers: this item is included in nep-ban, nep-bec, nep-mac and nep-rmg
Note: AP CF
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Citations: View citations in EconPapers (3)

Published as Bolton, Patrick & Chen, Hui & Wang, Neng, 2013. "Market timing, investment, and risk management," Journal of Financial Economics, Elsevier, vol. 109(1), pages 40-62.

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