Free Cash-Flow, Issuance Costs and Stock Price Volatility

Décamps, Jean-Paul, Mariotti, Thomas, Rochet, Jean-Charles and Villeneuve, Stéphane (2008) Free Cash-Flow, Issuance Costs and Stock Price Volatility. IDEI Working Paper, n. 518, Toulouse

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We study the issuance and payout policies that maximize the value of a firm facing both agency costs of free cash-flow and external financing costs. We find that the firm optimally issues equity. Equity distributes no dividends until a target cash level is reached, while new equity is issued when the firm runs out of cash. We characterize the process modelling the number of outstanding shares and the dynamics of the stock prices. In line with the leverage effect identified by Black (1976), we show that both the volatility of stock returns and the dollar volatility of stock prices increase after a negative shock on stock prices.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2008
Place of Publication: Toulouse
Uncontrolled Keywords: Issuance and Dividend Policies, Stock Price Volatility, Optimal Cash Management
JEL codes: G12 - Asset Pricing; Trading volume; Bond Interest Rates
G35 - Payout Policy
Divisions: Centre de Recherche en Management - CRM, Toulouse School of Economics - TSE
Institution: Université Toulouse Capitole
Site: UT1
Date Deposited: 13 May 2016 13:00
Last Modified: 18 Oct 2017 15:17

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