Corporate Policies with Permanent and Transitory Shocks: An Empirical Investigation

59 Pages Posted: 26 Jun 2017 Last revised: 12 Feb 2020

See all articles by Sebastian Gryglewicz

Sebastian Gryglewicz

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

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Enrique J. Schroth

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Philip Valta

University of Bern

Date Written: February 11, 2020

Abstract

Theory has recently shown that corporate policies should respond differently to permanent or transitory cash flow shocks. We devise a novel filter to decompose cash flow shocks into permanent and transitory components. The policy choices of large publicly traded U.S. firms, such as cash holdings, credit line usage, and equity issuance, are related to the characteristics of the shocks estimated by our filter, i.e., volatilities, correlation and drift rates of the permanent and transitory shocks, as predicted by theory. Moreover, the interaction between the permanent and transitory cash flow shocks is strongly related to a firm’s leadership status within its industry.

Keywords: cash flow risk, permanent and transitory shocks, liquidity management

JEL Classification: G31, G32, G35

Suggested Citation

Gryglewicz, Sebastian and Mancini, Loriano and Morellec, Erwan and Schroth, Enrique J. and Valta, Philip, Corporate Policies with Permanent and Transitory Shocks: An Empirical Investigation (February 11, 2020). Swiss Finance Institute Research Paper No. 18-21. Available at SSRN: https://ssrn.com/abstract=2992202 or http://dx.doi.org/10.2139/ssrn.2992202

Sebastian Gryglewicz

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

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

Loriano Mancini

USI Lugano - Institute of Finance ( email )

Via Giuseppe Buffi 6
6904 Lugano, CH-6904
Switzerland
+41 (0)91 912 46 47 (Fax)

HOME PAGE: http://www.people.usi.ch/mancil/

Swiss Finance Institute ( email )

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

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

Enrique J. Schroth

EDHEC Business School ( email )

393, Promenade Des Anglais
Nice, 06202
France
+33493186939 (Phone)

HOME PAGE: http://https://www.edhec.edu/en/faculty-and-researchers/schroth-enrique-phd

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

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