Free Cash-Flow, Issuance Costs and Stock Volatility

31 Pages Posted: 26 Feb 2008

See all articles by J. P. Decamps

J. P. Decamps

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ)

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

Decamps, J. P., Free Cash-Flow, Issuance Costs and Stock Volatility. Available at SSRN: https://ssrn.com/abstract=1097648 or http://dx.doi.org/10.2139/ssrn.1097648

J. P. Decamps (Contact Author)

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

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