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Transitory versus Permanent Shocks: Explaining Corporate Savings and Investment

Author

Listed:
  • Sebastian Gryglewicz

    (Erasmus University Rotterdam)

  • Loriano Mancini

    (University of Lugano and Swiss Finance Institute)

  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

  • Enrique J. Schroth

    (City University London and Centre for Economic Policy Research (CEPR))

  • Philip Valta

    (University of Bern)

Abstract

We model the investment and cash policies of a firm facing financing frictions, transitory cash flow shocks, and permanent productivity shocks. While cash holdings increase and investment and Tobin's $q$ decrease with the volatilities of either type of shocks, a higher correlation between these shocks makes the firm hold less cash, invest more, and become more valuable. We verify these predictions on a large sample of U.S. firms using estimates of permanent and transitory cash flow shocks obtained via structural estimation. Our results suggest that corporate policies and valuations are better understood when distinguishing between permanent and transitory cash flow shocks.

Suggested Citation

  • Sebastian Gryglewicz & Loriano Mancini & Erwan Morellec & Enrique J. Schroth & Philip Valta, 2018. "Transitory versus Permanent Shocks: Explaining Corporate Savings and Investment," Swiss Finance Institute Research Paper Series 18-21, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1821
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    Cited by:

    1. Dirk Hackbarth & Alejandro Rivera & Tak-Yuen Wong, 2022. "Optimal Short-Termism," Management Science, INFORMS, vol. 68(9), pages 6477-6505, September.
    2. Arkadiusz J. Derkacz & Agnieszka Dudziak, 2021. "Savings and Investment Decisions in the Polish Energy Sector," Sustainability, MDPI, vol. 13(2), pages 1-13, January.

    More about this item

    Keywords

    Cash holdings; Investment; permanent vs. transitory shocks;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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