Free Cash-Flow, Issuance Costs and Stock Volatility
31 Pages Posted: 26 Feb 2008
Abstract
We study the issuance and payout policy that maximizes the value of a firm facing both agency costs of free cash-flow and external financing costs. We find that firms have target cash levels and optimally issue equity when they run out of cash. We characterize the process modelling the number of outstanding shares and the dynamics of the stock prices. In line with the leverage effect identified by Black (1976), we show that both the volatility of stock returns and the dollar volatility of stock prices increase after a negative shock on stock prices.
Keywords: Issuance and dividend policies, optimal cash management, stock volatility
JEL Classification: G12, G35
Suggested Citation: Suggested Citation
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