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47
Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications,” Review of Economic Studies
"... An entrepreneur with limited liability needs to finance an infinite horizon investment project. An agency problem arises because she can divert operating cashflows before reporting them to the financiers. We first study the optimal contract in discrete time. This contract can be implemented by cash ..."
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Cited by 63 (2 self)
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An entrepreneur with limited liability needs to finance an infinite horizon investment project. An agency problem arises because she can divert operating cashflows before reporting them to the financiers. We first study the optimal contract in discrete time. This contract can be implemented by cash reserves, debt and equity. The latter is split between the financiers and the entrepreneur, and pays dividends when retained earnings reach a threshold. To provide appropriate incentives to the entrepreneur, the firm is downsized when it runs short of cash. We then study the continuoustime limit of the model. We prove the convergence of the discretetime value functions and optimal contracts. Our analysis yields rich implications for the dynamics of security prices. Stock prices follow a diffusion reflected at the dividend barrier and absorbed at zero. Their volatility, as well as the leverage ratio of the firm, increase after bad performance. Stock prices and booktomarket ratios are in a nonmonotonic relationship. A more severe agency problem entails lower price earning ratios and firm liquidity, and higher default risk.
On optimality of the barrier strategy in de Finetti’s dividend problem for spectrally negative Lévy processes
, 2007
"... We consider the classical optimal dividend control problem which was proposed by de Finetti [Trans. XVth Internat. Congress Actuaries ..."
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Cited by 53 (5 self)
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We consider the classical optimal dividend control problem which was proposed by de Finetti [Trans. XVth Internat. Congress Actuaries
Optimal bank capital with costly recapitalization
 University of Michigan, Department of
, 2006
"... We study optimal bank capital holdings in a dynamic setting where the bank has access to external capital, but this access is subject to a fixed cost and a delay. Our model indicates that a recapitalization option may be valuable despite substantial fixed costs, and that a significant fraction of th ..."
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Cited by 40 (1 self)
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We study optimal bank capital holdings in a dynamic setting where the bank has access to external capital, but this access is subject to a fixed cost and a delay. Our model indicates that a recapitalization option may be valuable despite substantial fixed costs, and that a significant fraction of the value of low capitalized banks may be attributable to the option to recapitalize. When calibrated to data on actual bank returns, the model yields capital ratios that are significantly lower than actual bank capital ratios. This shortfall is, at least partly, explained by the skewness of the distribution of actual bank returns and by the banks ' accounting options for the provisioning of credit losses. We operate the model with implied bank return volatilities, in the same way as BlackScholes model is used in practice. Analysis of the limiting cases where the capital market imperfections vanish reveals that the capital issue delay rather than the fixed cost determines the qualitative nature of the solution.
Controlling Risk Exposure and Dividends Payout Schemes: Insurance Company Example
 Mathematical Finance
, 1998
"... The paper represents a model for the financial valuation of a firm which has control on the dividend payment stream and its risk as well as potential profit by choosing different business activities among those available to it. This is an extension of the classical Miller Modigliani theory of firm v ..."
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Cited by 29 (1 self)
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The paper represents a model for the financial valuation of a firm which has control on the dividend payment stream and its risk as well as potential profit by choosing different business activities among those available to it. This is an extension of the classical Miller Modigliani theory of firm valuation theory to the situation of controllable business activities in stochastic environment. We associate the value of the company with the expected present value of the net dividend distributions (under the optimal policy). The example we consider is a large corporation such as an insurance company, whose liquid assets in the absence of control fluctuate as a Brownian motion with a constant positive drift and a constant diffusion coefficient. We interpret the diffusion coefficient as risk exposure, while drift is understood as potential profit. At each moment of time there is an option to reduce risk exposure, simultaneously reducing the potential profit, like using proportional reinsura...
Optimal Risk Control and Dividend Distribution Policies. Example of Excessof Loss Reinsurance for an Insurance Corporation
 Example of Excessof Loss Reinsurance, Finance and Stochastics
, 1998
"... We consider a model of a financial corporation which has to find an optimal policy balancing its risk and expected profits. The example treated in this paper is related to an insurance company with the risk control method known in the industry as excessofloss reinsurance. Under this scheme the ins ..."
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Cited by 27 (4 self)
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We consider a model of a financial corporation which has to find an optimal policy balancing its risk and expected profits. The example treated in this paper is related to an insurance company with the risk control method known in the industry as excessofloss reinsurance. Under this scheme the insurance company divert part of its premium stream to another company in exchange of an obligation to pick up that amount of each claim which exceeds a certain level a, This reduces the risk but it also reduces the potential profit. The objective is to make a dynamic choice of a and find the dividend distribution policy, which maximizes the cumulative expected discounted dividend payouts. We use diffusion approximation for this optimal control problem. Mathematical it becomes a mixed singularregular control problem for diffusion processes. Its analytical part is related to a free boundary (Stephan) problem for a linear second order differential equation. 1 Introduction The problem of optim...
Optimal Risk/Dividend Distribution Control Models. Applications to Insurance
 Company, Mathematical Methods of Operations Research
, 1999
"... The current paper presents a short survey of stochastic models of risk control and dividend optimization techniques for a financial corporation. While being close to consumption /investment models of Mathematical Finance, dividend optimization models possess special features which do not allow th ..."
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Cited by 22 (2 self)
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The current paper presents a short survey of stochastic models of risk control and dividend optimization techniques for a financial corporation. While being close to consumption /investment models of Mathematical Finance, dividend optimization models possess special features which do not allow them to be treated as a particular case of consumption/investment models.
A Diffusion Model for Optimal Dividend Distribution for a Company with Constraints on Risk Control
, 2000
"... We investigate a model of a corporation which faces constant liability payments and which can choose a production/business policy from an available set of control policies with different expected profits and risks. The objective is to maximize the expected present value of the total dividend dist ..."
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Cited by 20 (0 self)
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We investigate a model of a corporation which faces constant liability payments and which can choose a production/business policy from an available set of control policies with different expected profits and risks. The objective is to maximize the expected present value of the total dividend distributions. The main purpose of this paper is to deal with the impact of constraints on business activities such as inability to completely eliminate risk (even at the expense of reducing the potential profit to zero) or when such a risk cannot exceed a certain level. We analyze the case in which there is no restriction on the dividend payout rates. By delicate analysis on the corresponding HamiltonJacobi Bellman equation we compute explicitly the optimal return function and determine the optimal policy.
PreIPO operational and financial decisions
 Management Sci
, 2004
"... Many owners of growing privatelyheld firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an Initial Public Offering (IPO). We ask: “What is the right time to make an IPO? ” and “How should operational and financial decisions be coo ..."
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Cited by 13 (1 self)
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Many owners of growing privatelyheld firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an Initial Public Offering (IPO). We ask: “What is the right time to make an IPO? ” and “How should operational and financial decisions be coordinated to increase the likelihood of a successful IPO? ” Financial and operational decisions in this problem are linked because adequate financial capital is crucial for operational decisions to be feasible and operational decisions affect the firm’s access to financial resources. The IPO event is treated as a stopping time in an infinitehorizon discounted Markov decision process. Unlike traditional stopping time models, at every stage the model includes other decisions such as production, sales and loan size. The results include (1) characterization of an optimal capacityexpansion policy, (2) sufficient conditions for a monotone threshold rule to yield an optimal IPO decision, and (3) algorithmic implications of results in (1) and (2).
Optimality results for dividend problems in insurance
 ACSAM Rev. R. Acad. Cien. Serie A. Mat
"... This paper is a survey of some classical contributions and recent progress in identifying optimal dividend payment strategies in the framework of collective risk theory. In particular, available mathematical tools are discussed and some challenges are described that occur under various objective fu ..."
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Cited by 11 (0 self)
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This paper is a survey of some classical contributions and recent progress in identifying optimal dividend payment strategies in the framework of collective risk theory. In particular, available mathematical tools are discussed and some challenges are described that occur under various objective functions and model assumptions. Finally, some open research problems in this field are stated. AMS classification: 93E20, 62P05, 91B30, 60J25 1
Optimal control with absolutely continuous strategies for spectrally negative Lévy processes
 J. Appl. Probab
, 2012
"... Lévy processes ∗ ..."
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