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Free Cash Flow, Issuance Costs, and Stock Prices
Author(s) -
DÉCAMPS JEANPAUL,
MARIOTTI THOMAS,
ROCHET JEANCHARLES,
VILLENEUVE STÉPHANE
Publication year - 2011
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2011.01680.x
Subject(s) - cash flow , volatility (finance) , free cash flow , stock (firearms) , agency cost , monetary economics , dividend , economics , business , financial economics , finance , corporate governance , shareholder , mechanical engineering , engineering
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.