Corporate Policies and the Term Structure of Risk
54 Pages Posted: 26 Jun 2020
Date Written: June 15, 2020
We build a dynamic corporate finance model with heterogeneity in the pricing and in the firm's exposure to aggregate risks. All else equal, we show that if long-term (persistent) shocks have a higher market price than short-term (temporary) shocks, firms shorten the horizon of corporate policies, favoring payouts over investment. In the cross section, this effect is stronger for firms more exposed to long-term shocks, but can be reversed for firms more exposed to short-term shocks. Our analysis is extended to embed time variation in risk prices over the business cycle, motivated by recent evidence on the term structure of equity.
Keywords: Temporary vs. permanent shocks, Pricing of aggregate risks, Horizon of corporate policies
JEL Classification: G12, G31, G32
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