Corporate Policies and the Term Structure of Risk

54 Pages Posted: 26 Jun 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 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

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 and C Street NW
Washington, DC 20551
United States

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