Transitory versus Permanent Shocks: Explaining Corporate Savings and Investment

63 Pages Posted: 26 Jun 2017 Last revised: 15 Mar 2018

Sebastian Gryglewicz

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

Loriano Mancini

University of Lugano - Institute of Finance; Swiss Finance Institute

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Enrique J. Schroth

City University London - Cass Business School; Centre for Economic Policy Research (CEPR)

Philip Valta

University of Bern

Date Written: July 11, 2017

Abstract

We model the investment and cash policies of a firm facing financing frictions, transitory cash flow shocks, and permanent productivity shocks. While cash holdings increase and investment and Tobin's $q$ decrease with the volatilities of either type of shocks, a higher correlation between these shocks makes the firm hold less cash, invest more, and become more valuable. We verify these predictions on a large sample of U.S. firms using estimates of permanent and transitory cash flow shocks obtained via structural estimation. Our results suggest that corporate policies and valuations are better understood when distinguishing between permanent and transitory cash flow shocks.

Keywords: Cash holdings, Investment, permanent vs. transitory shocks

JEL Classification: G31, G32, G35

Suggested Citation

Gryglewicz, Sebastian and Mancini, Loriano and Morellec, Erwan and Schroth, Enrique J. and Valta, Philip, Transitory versus Permanent Shocks: Explaining Corporate Savings and Investment (July 11, 2017). 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

University of 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

City University London - Cass Business School ( email )

London, EC1Y 8TZ
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
112
rank
224,450
Abstract Views
526
PlumX