Exit Options and Dividend Policy Under Liquidity Constraints

Abstract

We introduce a post-entry liquidity constraint to the standard model of a …rm with serially correlated pro…tability and an irreversible exit decision. We assume that …rms with no cash holdings and negative cash ‡ow must either exit or raise new cash at a transaction cost. This creates a precautionary motive for holding cash, which must be traded o¤ against the liquidity cost of holding cash. We characterize the optimal exit and payout policy. The direct e¤ect of …nancial frictions is to impose ine¢ cient exit, but there is also an indirect e¤ect through higher equilibrium price which leads to ine¢ cient survival. (D81, D92, G35)We thank the Editor, two anonymous referees,

Optimal Dividend Policies with Random Profitability

“…In fact, the Assumption 3.1 only imposes asymptotic conditions as |µ| → ∞. This means that on any given bounded domain, κ andσ can be general, provided certain growth conditions are satisfied outside the bounded domain,1 Similar properties have been observed by Anderson and Carverhill[6] and Murto and Terviö[31].…”

Inter-industry and intra-industry switching as sources of productivity growth: structural change of Finland’s ICT industries

“…In reality, market exit often occurs involuntarily through bankruptcy. Murto and Terviö (2014) address this possibility by introducing a model that includes forced exit due to liquidity constraints. In this model, firms may be forced to exit the market due to a lack of liquidity, even if it would still be profitable to stay in business.…”

Learning about profitability and dynamic cash management

“…All these contributions develop one-dimensional models (or can be reduced to one-dimensional models thanks to scaling properties). Anderson and Caverhill (2012), Murto and Tervio (2014), Bolton, Wang and Yang (2019), Reppen, Rochet and Soner (2020) develop in different settings two-dimensional corporate cash models with random profitability. As in our study, the firm's decision depends upon two state variables, the current profitability and the current level of liquid assets.…”

“…In Anderson and Caverhill (2012) and Reppen, Rochet and Soner (2020) the long-term profitability of the firm's project corresponds to the mean parameter of the drift of an Ornstein Uhlenbeck process. In Murto and Tervio (2014) and Bolton, Wang and Yang (2019), the long-term profitability corresponds to the drift of a Geometric Brownian motion that models the earnings fundamentals. These models share important common features.…”

“…See for instanceMurto and Tervio (2014),Décamps, Gryglewicz, Morellec and Villeneuve (2017),Bolton, Wang and Yang (2019),Babenko and Tserlukevich (2021) for corporate models with permanent shocks.26 We thank the referee for this suggestion.27 See DMRV (2011) for a complete mathematical analysis in a one-dimensional model. SeeReppen, Rochet and Soner (2020) for numerical approximations in a two-dimensional model.28 See for instanceDécamps and Villeneuve (2007), Bolton Chen and Wang (2011), Bolton, Wang and Yang (2019),Babenko and Tserlukevich (2021).…”