Free Cash Flow, Issuance Costs, and Stock Prices

Résumé

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.

Référence

Jean-Paul Décamps, Thomas Mariotti, Jean-Charles Rochet et Stéphane Villeneuve, « Free Cash Flow, Issuance Costs, and Stock Prices », The Journal of Finance, vol. 66, n° 5, octobre 2011, p. 1501–1544.