Corporate Policies and the Term Structure of Risk

Matthijs Breugem, Roberto Marfe () and Francesca Zucchi

No 627, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: We build a dynamic corporate finance model with heterogeneity in the pricing and in the firm’s exposure to aggregate risks of various persistence. All else equal, we show that if long-term (persistent) shocks have a higher market price than short term (temporary) shocks, firms shorten the horizon of corporate policies, favoring payouts over investment. In the cross section, this effect is stronger for firms more exposed to long-term shocks, but can be reversed for firms more exposed to short term shocks. Our analysis is extended to embed time variation in risk prices over the business cycle, motivated by recent evidence on the term structure of equity.

Keywords: Temporary vs. permanent shocks; Pricing of aggregate risk; Horizon of corporate policies. (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 (search for similar items in EconPapers)
Pages: pages 60
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:627

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