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Free Cash-Flow, Issuance Costs and Stock Price Volatility

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  • Décamps, Jean-Paul
  • Mariotti, Thomas
  • Rochet, Jean-Charles
  • Villeneuve, Stéphane

Abstract

We study the issuance and payout policies that maximize the value of a firm facing both agency costs of free cash-flow and external financing costs. We find that the firm optimally issues equity. Equity distributes no dividends until a target cash level is reached, while new equity is issued when the firm runs out of cash. We characterize the process modelling the number of outstanding shares and the dynamics of the stock prices. In line with the leverage effect identified by Black (1976), we show that both the volatility of stock returns and the dollar volatility of stock prices increase after a negative shock on stock prices.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 518.

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Date of creation: Sep 2008
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Handle: RePEc:ide:wpaper:7179

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Cited by:
  1. Léautier, Thomas-Olivier & Rochet, Jean-Charles, 2013. "On the strategic value of risk management," IDEI Working Papers 797, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Léautier, Thomas-Olivier & Rochet, Jean-Charles, 2012. "On the strategic value of risk management," IDEI Working Papers 739, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Léautier, Thomas-Olivier & Rochet, Jean-Charles, 2013. "On the strategic value of risk management," TSE Working Papers 13-433, Toulouse School of Economics (TSE).
  4. Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," AMSE Working Papers 1310, Aix-Marseille School of Economics, Marseille, France, revised Feb 2013.
  5. Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," Working Papers halshs-00796490, HAL.
  6. Flavia Barsotti, 2012. "Optimal Capital Structure with Endogenous Default and Volatility Risk," Working Papers - Mathematical Economics 2012-02, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  7. Villeneuve, Stéphane & Warin, Xavier, 2013. "Optimal Liquidity management and Hedging in the presence of a non-predictable investment opportunity," Economics Papers from University Paris Dauphine 123456789/12476, Paris Dauphine University.

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