We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. We show that permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies and use the model to...

I develop a dynamic capital structure model to examine how the nature of risk affects firm's debt policy. In the model, firm's fundamental risk, captured by its cash flow process, consists of transitory and persistent parts with markedly different dynamics. The model explains the observed...

We consider a dynamic model of investment in which a firm can hold inventory to mitigate the price risk of an input commodity. Our model predicts that inventory allows to hedge against net worth risk by smoothing investment in capital, irrespective of the level of current net worth. Savings...

We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41...

We study the optimal timing of security issuance to finance a new project when the firm's assets in place have unobservable quality. Stochastic cash flows generated by assets in place reveal information about their quality and simultaneously reduce the required outside funding. A high-quality...

We compare the investment of standalone firms across regions after a positive shock to the investment opportunities generated by a large-scale highway development project. We show that the standalones' investment sensitivity is lower in regions with a higher density of business groups in the...

This essay surveys the body of research that asks how the efficiency of corporate investment is influenced by problems of asymmetric information and agency. I organize the material around two basic questions. First, does the external capital market channel the right amount of money to each firm?...

We create a firm-level ChatGPT investment score, based on conference calls, that measures managers' anticipated changes in capital expenditures. We validate the score with interpretable textual content and its strong correlation with CFO survey responses. The investment score predicts future...

We develop a dynamic model of investment, capital structure, leasing, and risk management based on firms' need to collateralize promises to pay with tangible assets. Both financing and risk management involve promises to pay subject to collateral constraints. Leasing is strongly collateralized...

We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that...