Transitory versus Permanent Shocks: Explaining Corporate Savings and Investment

Sebastian Gryglewicz, Loriano Mancini, Erwan Morellec, Enrique J. Schroth and Philip Valta
Additional contact information
Loriano Mancini: University of Lugano and Swiss Finance Institute
Erwan Morellec: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute
Enrique J. Schroth: City University London and Centre for Economic Policy Research (CEPR)

No 18-21, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We model the investment and cash policies of a firm facing financing frictions, transitory cash flow shocks, and permanent productivity shocks. While cash holdings increase and investment and Tobin's $q$ decrease with the volatilities of either type of shocks, a higher correlation between these shocks makes the firm hold less cash, invest more, and become more valuable. We verify these predictions on a large sample of U.S. firms using estimates of permanent and transitory cash flow shocks obtained via structural estimation. Our results suggest that corporate policies and valuations are better understood when distinguishing between permanent and transitory cash flow shocks.

Keywords: Cash holdings; Investment; permanent vs. transitory shocks (search for similar items in EconPapers)
JEL-codes: G31 G32 G35 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2018-03
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1821

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