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Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title Free cash flow, issuance costs, and stock prices
Organization Unit
  • Jean-Charles Rochet
  • Thomas Mariotti
  • Jean-Paul Décamps
  • Stéphane Villeneuve
Item Subtype Original Work
Refereed Yes
Status Published in final form
  • English
Journal Title Journal of Finance
Publisher Wiley-Blackwell
Geographical Reach international
ISSN 0022-1082
Volume 66
Number 5
Page Range 1501 - 1544
Date 2011
Abstract Text We develop a dynamic model of a firm facing agency costs of free cash flow and externalfinancing 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.
Official URL
Digital Object Identifier 10.1111/j.1540-6261.2011.01680.x
Other Identification Number merlin-id:6040
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