Free Cash Flows, Inssuance Costs and Volatility

Jean-Paul Décamps, Thomas Mariotti, Jean-Charles Rocher and Stephane Villeneuve
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Thomas Mariotti: GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique
Jean-Charles Rocher: Swiss Finance Institute [Geneva] - Swiss Finance Institute

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Abstract: We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs. An explicit solution for the firm's optimal balance sheet dynamics is derived. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns

Keywords: VOLATILITY (Finance); CORPORATIONS Cash position; STOCKS (Finance) Prices; AGENCY costs; CASH flow; "BUSINESS cycles"; "STOCKS (Finance) Rate of return"; "SECURITIES"; " CORPORATIONS -- Finance "DIVIDENDS"; "RATE of return"; "FINANCE Mathematical models"; "CASH flow"; "AGENCY costs"; "STOCKS (Finance) Prices"; "CORPORATIONS Cash position"; "VOLATILITY (Finance)"; "RISK management in business"; FINANCE Mathematical models; RATE of return; CORPORATIONS -- Finance "DIVIDENDS; SECURITIES; STOCKS (Finance) Rate of return; BUSINESS cycles; RISK management in business (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

Published in Journal of Finance, 2011, 66 (5), pp.1501-1544. ⟨10.1111/j.1540-6261.2011.01680.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00738437

DOI: 10.1111/j.1540-6261.2011.01680.x

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