Abstract: How does a firm's optimal cash, issuance, default, payout, and investment policies vary over its life cycle? To answer this question, we relax the assumption of homogeneity in size in models of firm dynamics. Our Cash-Cap model has two state variables: cash and capital. We find support in the data for new predictions: (1) issuance-to-capital ratios decrease convexly in capital, (2) payout-to-capital ratios are concave in capital, (3) investment-to-cash holdings sensitivities decrease in capital, and (4) cash holdings-to- volatility sensitivities increase in capital. We prove the uniqueness of the model solution and convergence of the numeric algorithm. This is a joint work with Ali Kakhbod, Max Reppen, and Tarik Umar.

Bio:
Hao Xing is an associate professor in finance at Boston University. Before joining Boston University, he worked at Department of Statistics, London School of Economics, and obtained his PhD from University of Michigan. Hao’s research focuses on stochastic control and applications in financial economics.

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