Corporate Policies with Permanent and Temporary Shocks

63 Pages Posted: 17 Feb 2015

See all articles by J. P. Decamps

J. P. Decamps

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

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Stephane Villeneuve

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: February 2015

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

JEL Classification: G31, G32, G35

Suggested Citation

Decamps, J. P. and Gryglewicz, Sebastian and Morellec, Erwan and Villeneuve, Stéphane, Corporate Policies with Permanent and Temporary Shocks (February 2015). CEPR Discussion Paper No. DP10420, Available at SSRN: https://ssrn.com/abstract=2566323

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

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Stéphane Villeneuve

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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