Corporate Policies and the Term Structure of Risk

65 Pages Posted: 26 Jun 2020 Last revised: 16 Apr 2021

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

The relative pricing of short-term (transitory) versus long-term (persistent) risks is a key, yet overlooked, aspect of firms' intertemporal decisions. In a dynamic model with financing frictions, we show that firms should extend their horizon if short-term shocks have a greater market price than long-term ones. Ignoring this relative pricing leads to distorted policies that overweight the short-term, including excessive payouts, underinvestment, lower-than-optimal equity issuances and precautionary savings, and excessive disinvestment when constraints tighten. The analysis is extended to allow for heterogeneous firm exposure to these risks and time variation in their risk prices, consistent with the evidence.

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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
203
Abstract Views
937
rank
208,423
PlumX Metrics