Market Timing, Investment, and Risk Management
By Patrick Bolton, Hui Chen, Neng Wang. 2012
377 citations recorded by the source corpus.
Firms face uncertain financing conditions, which can be quite severe as exemplified by the recent financial crisis. We capture the firm's precautionary cash hoarding and market timing motives in a tractable model of dynamic corporate financial management when external financing conditions are stochastic. Firms value financial slack and build cash reserves to mitigate financial constraints. The finitely-lived favorable financing condition induces them to rationally time the equity market. This market timing motive can cause investment to be decreasing (and the marginal value of cash to be increasing) in financial slack, and can lead a financially constrained firm to gamble. Quantitatively, we find that firms' optimal responses to the threat of a financial crisis can significantly smooth out the impact of financing shocks on investments, marginal values of cash, and the risk premium over time. Thus, a firm may still appear unconstrained based on its relatively smooth investment over time despite significant underinvestment. This smoothing effect can be used to disentangle financing shocks from productivity shocks empirically.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/d1a984e6fcf7cf42b1059d7094c03f5b1724503a
How researchers see this paper
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In Accounting
- Artyom Durnev
- C. Mangen
- Cosmin L. Ilut
- Missaka Warusawitharana
- Martin Schneider
- Francesco Bianchi
- Toni M. Whited
- L. Frésard
In Finance
- Cosmin L. Ilut
- Artyom Durnev
- Francesco Bianchi
- Martin Schneider
- C. Mangen
- Missaka Warusawitharana
- Toni M. Whited
- L. Frésard
Citations in the corpus
- The spillover effects of MD&A disclosures for real investment: The role of industry competition (2019, methodology): “Prior research has used data on populations to measure industry size (Bresnahan and Reiss, 1987); we do not have such data available for our 3-digit SIC industries.”
- Equity Market Misvaluation, Financing, and Investment (2015, background): “It is important to note that the Bellman equation (20) does not imply that the model contains stochastic issuance costs, as in Eisfeldt and Muir (2012) or Bolton et al. (2013). This distinction is important for three reasons.”
- Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2018, positive): “Several recent papers have emphasized shocks that occur at this packaging stage, such as costs to raising different types of external funds (e.g., Bolton et al. (2013), Eisfeldt and Muir (2014) and Belo et al. (2014)).”