Journal of Finance Vol. 66 No. 5 2011

Free Cash Flow, Issuance Costs, and Stock Prices

Jean-Paul Décamps¹; Thomas Mariotti²; Jean-Charles Rochet³; Stéphane Villeneuve^4,5,1

¹ Toulouse School of Economics · ² Groupe de recherche en économie mathématique et quantitative · ³ University of Zurich · ⁴ Centre National de la Recherche Scientifique · ⁵ École Polytechnique

Abstract

We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs, and derive an explicit solution for the firm's optimal balance sheet dynamics. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns.

DOI

10.1111/j.1540-6261.2011.01680.x

Volume

66

Issue

5

Pages

1501-1544

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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