Abstract
We model the investment and cash policies of a firm facing financing frictions, transitory cash flow shocks, and permanent productivity shocks. While cash holdings increase and investment and Tobin's $q$ decrease with the volatilities of either type of shocks, a higher correlation between these shocks makes the firm hold less cash, invest more, and become more valuable. We verify these predictions on a large sample of U.S. firms using estimates of permanent and transitory cash flow shocks obtained via structural estimation. Our results suggest that corporate policies and valuations are better understood when distinguishing between permanent and transitory cash flow shocks.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.