We develop a dynamic model of investment, financing, liquidity and risk manage- ment policies in which firms face financing frictions and are subject to permanent and temporary cash ow shocks. In this model, the cash- ow sensitivity of cash increases with financing constraints and cash ow volatility. Persistence of cash ow shocks and volatility of permanent shocks help manage corporate liquidity. Temporary shocks volatility hinders it. More profitable firms access equity markets less often but raise more funds when doing so. Hedging permanent or temporary shocks may involve op- posite positions. Derivatives usage and asset substitution are not equivalent when hedging permanent shocks.
Corporate policies; permanent vs; temporary shocks; financing frictions;
- F32: Current Account Adjustment • Short-Term Capital Movements
- G31: Capital Budgeting • Fixed Investment and Inventory Studies • Capacity
- G35: Payout Policy
Jean-Paul Décamps, S. Gryglewicz, E. Morellec, and Stéphane Villeneuve, “Corporate Policies with Temporary and Permanent Shocks”, The Review of Financial Studies, vol. 30, n. 1, January 2017, pp. 162–210.
TSE Working Paper, n. 15-552, January 2015, revised June 15, 2016