Corporate policies with permanent and temporary shocks

Décamps, Jean Paul, Erwan Morellec, Stephane Villeneuve and Sebastian Gryglewicz
Authors registered in the RePEc Author Service: Jean-Paul Décamps

No 10420, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that the payout policy of the firm, its financing policy, and its cash-flow sensitivity of cash display a more realistic behavior than in prior models with financing frictions. In addition, risk management policies are richer and depend on the nature of cash flow shocks and potential collateral constraints. Lastly, the timing of investment and the firm?s initial asset mix both reflect financing frictions and the joint effects of permanent and temporary shocks.

Keywords: Corporate policies; Financing frictions; Permanent vs. temporary shocks; Risk management (search for similar items in EconPapers)
JEL-codes: G31 G32 G35 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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