Corporate Policies with Permanent and Transitory Shocks

60 Pages Posted: 2 Mar 2016

See all articles by Jean-Paul Decamps

Jean-Paul Decamps

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

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: March 2, 2016

Abstract

We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. We show that permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies and use the model to develop a rich set of empirical predictions. In our model, correlated permanent and transitory shocks imply less risk, lower cash savings, and a drop in the value of credit lines. The composition of cash-flow shocks affects the cash-flow sensitivity of cash, which can be positive or negative. Optimal hedging of permanent and transitory shocks may involve opposite positions.

Keywords: Financing frictions; cash holdings; risk management; credit lines; permanent and transitory shocks

JEL Classification: G31, G32, G35

Suggested Citation

Decamps, Jean-Paul and Gryglewicz, Sebastian and Morellec, Erwan and Villeneuve, Stéphane, Corporate Policies with Permanent and Transitory Shocks (March 2, 2016). Swiss Finance Institute Research Paper No. 16-18, Available at SSRN: https://ssrn.com/abstract=2741003 or http://dx.doi.org/10.2139/ssrn.2741003

Jean-Paul Decamps

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

21 allée de Brienne
31015 Toulouse Cedex 6
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 (Contact Author)

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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