Market timing, investment, and risk management
Author(s)Bolton, Patrick; Chen, Hui; Wang, Neng
MetadataShow full item record
The 2008 financial crisis exemplifies significant uncertainties in corporate financing conditions. We develop a unified dynamic q-theoretic framework where firms have both a precautionary-savings motive and a market-timing motive for external financing and payout decisions, induced by stochastic financing conditions. The model predicts (1) cuts in investment and payouts in bad times and equity issues in good times even without immediate financing needs; (2) a positive correlation between equity issuance and stock repurchase waves. We show quantitatively that real effects of financing shocks may be substantially smoothed out as a result of firms' adjustments in anticipation of future financial crises.
DepartmentSloan School of Management
Journal of Financial Economics
Bolton, Patrick, Hui Chen, and Neng Wang. “Market Timing, Investment, and Risk Management.” Journal of Financial Economics 109, no. 1 (July 2013): 40–62.