Corporate Policies and the Term Structure of Risk

60 Pages Posted: 26 Jun 2020 Last revised: 5 Oct 2020

See all articles by Matthijs Breugem

Matthijs Breugem

University of Turin - Collegio Carlo Alberto

Roberto Marfè

University of Turin - Collegio Carlo Alberto

Francesca Zucchi

Federal Reserve Board

Date Written: June 15, 2020

Abstract

We introduce heterogeneity in the pricing of aggregate risks of various persistence into a dynamic corporate finance model with financing frictions. 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, increasing payouts and reducing investment, keeping less precautionary cash, and favoring asset sales to outside financing when financial constraints tighten. The analysis is extended to allow for heterogeneous firm's exposure to these risks and to embed time variation in their risk prices. Our model demonstrates that accounting for the term structure of risk prices is key to devise optimal real and financial policies.

Keywords: Temporary vs. permanent shocks, Pricing of aggregate risks, Horizon of corporate policies

JEL Classification: G12, G31, G32, G35

Suggested Citation

Breugem, Matthijs and Marfè, Roberto and Zucchi, Francesca, Corporate Policies and the Term Structure of Risk (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3601718 or http://dx.doi.org/10.2139/ssrn.3601718

Matthijs Breugem (Contact Author)

University of Turin - Collegio Carlo Alberto ( email )

Piazza Albarello 8
Torino, Torino 10122
Italy

Roberto Marfè

University of Turin - Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10122
Italy

Francesca Zucchi

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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