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Contribution Details
Type | Journal Article |
Scope | Discipline-based scholarship |
Title | Free cash flow, issuance costs, and stock prices |
Organization Unit | |
Authors |
|
Item Subtype | Original Work |
Refereed | Yes |
Status | Published in final form |
Language |
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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. |
Digital Object Identifier | 10.1111/j.1540-6261.2011.01680.x |
Other Identification Number | merlin-id:6040 |
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