Corporate Policies with Permanent and Transitory Shocks: An Empirical Investigation
59 Pages Posted: 26 Jun 2017 Last revised: 12 Feb 2020
Date Written: February 11, 2020
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: Suggested Citation