Corporate Policies with Permanent and Transitory Shocks

Jean-Paul Decamps, Sebastian Gryglewicz, Erwan Morellec and Stephane Villeneuve
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Jean-Paul Decamps: University of Toulouse 1 - Toulouse School of Economics (TSE)
Erwan Morellec: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Stephane Villeneuve: University of Toulouse 1 - Toulouse School of Economics (TSE)

No 16-18, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. We show that permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies and use the model to develop a rich set of empirical predictions. In our model, correlated permanent and transitory shocks imply less risk, lower cash savings, and a drop in the value of credit lines. The composition of cash-flow shocks affects the cash-flow sensitivity of cash, which can be positive or negative. Optimal hedging of permanent and transitory shocks may involve opposite positions.

Keywords: Financing frictions; cash holdings; risk management; credit lines; permanent and transitory shocks (search for similar items in EconPapers)
JEL-codes: G31 G32 G35 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2016-03
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1618

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