Market timing, investment, and risk management

Patrick Bolton, Hui Chen and Neng Wang

Journal of Financial Economics, 2013, vol. 109, issue 1, 40-62

Abstract: The 2008 financial crisis exemplifies significant uncertainties in corporate financing conditions. We develop a unified dynamic q-theoretic framework where firms have both a precautionary-savings motive and a market-timing motive for external financing and payout decisions, induced by stochastic financing conditions. The model predicts (1) cuts in investment and payouts in bad times and equity issues in good times even without immediate financing needs; (2) a positive correlation between equity issuance and stock repurchase waves. We show quantitatively that real effects of financing shocks may be substantially smoothed out as a result of firms' adjustments in anticipation of future financial crises.

Keywords: Risk management; Liquidity; Financial crisis; Market timing; Investment; q theory (search for similar items in EconPapers)
JEL-codes: E22 E44 G30 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (146)

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Working Paper: Market Timing, Investment, and Risk Management (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:1:p:40-62

DOI: 10.1016/j.jfineco.2013.02.006

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