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Corporate Policies with Permanent and Transitory Shocks

Author

Listed:
  • Jean-Paul Decamps

    (University of Toulouse 1 - Toulouse School of Economics (TSE))

  • Sebastian Gryglewicz

    (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE))

  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute)

  • Stephane Villeneuve

    (University of Toulouse 1 - Toulouse School of Economics (TSE))

Abstract

We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. We show that permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies and use the model to develop a rich set of empirical predictions. In our model, correlated permanent and transitory shocks imply less risk, lower cash savings, and a drop in the value of credit lines. The composition of cash-flow shocks affects the cash-flow sensitivity of cash, which can be positive or negative. Optimal hedging of permanent and transitory shocks may involve opposite positions.

Suggested Citation

  • Jean-Paul Decamps & Sebastian Gryglewicz & Erwan Morellec & Stephane Villeneuve, 2016. "Corporate Policies with Permanent and Transitory Shocks," Swiss Finance Institute Research Paper Series 16-18, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1618
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    File URL: http://ssrn.com/abstract=2741003
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    Citations

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    Cited by:

    1. Lambrecht, Bart & Chen, Shiqi, 2019. "Financial Policies and Internal Governance with Heterogeneous Risk Preferences," CEPR Discussion Papers 13888, C.E.P.R. Discussion Papers.
    2. Alessandro Barattieri & Matteo Cacciatore, 2023. "Self-Harming Trade Policy? Protectionism and Production Networks," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 97-128, April.
    3. repec:zbw:bofrdp:2019_018 is not listed on IDEAS
    4. Lambrecht, Bart & Tse, Alex, 2019. "Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending," CEPR Discussion Papers 13734, C.E.P.R. Discussion Papers.
    5. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    6. Della Seta, Marco & Morellec, Erwan & Zucchi, Francesca, 2020. "Short-term debt and incentives for risk-taking," Journal of Financial Economics, Elsevier, vol. 137(1), pages 179-203.
    7. Andrew B. Abel & Stavros Panageas, 2020. "Precautionary Saving in a Financially-Constrained Firm," NBER Working Papers 26628, National Bureau of Economic Research, Inc.
    8. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).
    9. Lin, Chunpeng & Yang, Jinqiang, 2022. "Entrepreneur’s incentives for risk-taking and short-term debt," International Review of Financial Analysis, Elsevier, vol. 84(C).
    10. Morellec, Erwan & Gryglewicz, Sebastian & Mayer, Simon, 2018. "Agency Conflicts over the Short and Long Run: Short-termism, Long-termism, and Pay-for-Luck," CEPR Discussion Papers 12720, C.E.P.R. Discussion Papers.
    11. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
    12. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2020. "Agency conflicts and short- versus long-termism in corporate policies," Journal of Financial Economics, Elsevier, vol. 136(3), pages 718-742.
    13. Grijalva, Diego F. & Uribe-Terán, Carlos & Gachet, Iván, 2024. "The Contractionary Effects of Protectionist Trade Policy in a Dollarized Economy," IDB Publications (Working Papers) 13358, Inter-American Development Bank.
    14. Albertus, James F. & Glover, Brent & Levine, Oliver, 2022. "Foreign investment of US multinationals: The effect of tax policy and agency conflicts," Journal of Financial Economics, Elsevier, vol. 144(1), pages 298-327.
    15. Hackbarth, Dirk & Rivera, Alejandro & Wong, Tak-Yuen, 2018. "Optimal Short-Termism," CEPR Discussion Papers 12588, C.E.P.R. Discussion Papers.
    16. Li, Delong & Lu, Lei & Mu, Congming & Yang, Jinqiang, 2019. "Biased beliefs, costly external finance, and firm behavior : A Unified theory," Research Discussion Papers 18/2019, Bank of Finland.
    17. Andrew B Abel & Stavros Panageas, 2023. "Precautionary Saving in a Financially Constrained Firm," The Review of Financial Studies, Society for Financial Studies, vol. 36(7), pages 2878-2921.
    18. Matthijs Breugem & Roberto Marfè & Francesca Zucchi, 2020. "Corporate Policies and the Term Structure of Risk," Carlo Alberto Notebooks 627, Collegio Carlo Alberto.

    More about this item

    Keywords

    Financing frictions; cash holdings; risk management; credit lines; permanent and transitory shocks;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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