Free Cash Flow, Issuance Costs, And Macroeconomics Risk

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Free Cash Flow, Issuance Costs, and Macroeconomics
Risk

Qiaozhi Hu
Questrom School of Business
Boston University
June 30, 2015

I thank Dirk Hackbarth, Andrew Lyaso and MF930 participants at Boston University for helpful comments.
Send correspondence to Qiaozhi Hu, Boston University Questrom School of Business, 595 Commonwealth Ave,
Boston, MA 02215, USA; telephone: (732)809-1105. E-mail: qiaozhih@bu.edu.
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Free Cash Flow, Issuance Costs, and Macroeconomics Risk
Abstract
This research proposal develops a dynamic framework analyzing the impact of macroeconomic conditions on dividend policy, equity issuance policy, stock prices and agency costs of free cash ow. I begin by observing that both equity issuance and agency costs both depend on the aggregate state of economy. However, the existing literature is silent on the stock price dynamics and agency costs of free cash ow in the presence of macroeconomics risk, issuance and agency costs. I then describe the expected results: (1) Characterizing the rm 's optimal equity issuance and dividend pay out policies in di erent regimes; (2) Study on the stock price and asymmetric volatility under the optimal cash management policies in the presence of macroeconomic risk; (3) The model would probably predict free cash ow problem is more severe in expansion regime than that in contraction regime. A literature review is added to talk about the prior research in the related areas. I also analyze the rst-best benchmark case where

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