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Corporate policies with permanent and temporary shocks

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  • Décamps, Jean Paul
  • Gryglewicz, Sebastian
  • Morellec, Erwan
  • Villeneuve, Stéphane

Abstract

We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that the payout policy of the firm, its financing policy, and its cash-flow sensitivity of cash display a more realistic behavior than in prior models with financing frictions. In addition, risk management policies are richer and depend on the nature of cash flow shocks and potential collateral constraints. Lastly, the timing of investment and the firm’s initial asset mix both reflect financing frictions and the joint effects of permanent and temporary shocks.

Suggested Citation

  • Décamps, Jean Paul & Gryglewicz, Sebastian & Morellec, Erwan & Villeneuve, Stéphane, 2015. "Corporate policies with permanent and temporary shocks," CEPR Discussion Papers 10420, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10420
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate policies; financing frictions; permanent vs. temporary shocks; risk management;

    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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