Corporate Policies with Permanent and Transitory Shocks

Sebastian Gryglewicz, J-P Décamps, E Morellec, S Villeneuve

Research output: Contribution to journalArticleAcademicpeer-review

25 Citations (Scopus)


We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. The permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies. We use the model to develop a rich set of empirical predictions. In our model, correlated permanent and transitory shocks imply less risk, lower cash savings, and a drop in the value of credit lines. The composition of cash-flow shocks affects the cash-flow sensitivity of cash, which can be positive or negative. Optimal hedging of permanent and transitory shocks may involve opposite positions.
Original languageEnglish
Pages (from-to)162-210
Number of pages49
JournalThe Review of Financial Studies
Issue number1
Publication statusPublished - 2017


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