Market Frictions and Corporate Finance: An Overview Paper

Moreno-Bromberg, Santiago; Rochet, Jean‐Charles

doi:10.2139/ssrn.2437852

Cited by 2 publications

(2 citation statements)

References 25 publications

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“…Furthermore, from Table 2, we note that b 2 is increasing when µ 2 increases in the interval [−0.39, 0.5] and then decreases when µ 2 continues to increase. This is consistent with what it is observed in the no-regime-switching case (see, e.g., Section 2.4 in [27]). When µ 2 is relatively large fewer precautionary reserves are needed.…”

Section: A Numerical Studysupporting

confidence: 91%

Optimal Dividends under Markov-Modulated Bankruptcy Level

Ferrari¹,

Schuhmann²,

Zhu³

2021

Preprint

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This paper proposes and solves an optimal dividend problem in which a two-state regimeswitching environment affects the dynamics of the company's cash surplus and, as a novel feature, also the bankruptcy level. The aim is to maximize the total expected profits from dividends until bankruptcy. The company's optimal dividend payout is therefore influenced by four factors simultaneously: Brownian fluctuations in the cash surplus, as well as regime changes in drift, volatility and bankruptcy levels. In particular, the average profitability can assume different signs in the two regimes. We find a rich structure of the optimal strategy, which, depending on the interaction of the model's parameters, is either of barrier-type or of liquidation-barrier type. Furthermore, we provide explicit expressions of the optimal policies and value functions. Finally, we complement our theoretical results by a detailed numerical study, where also a thorough analysis of the sensitivities of the optimal dividend policy with respect to the problem's parameters is performed.

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Section: A Numerical Studysupporting

confidence: 91%

Optimal Dividends under Markov-Modulated Bankruptcy Level

Ferrari¹,

Schuhmann²,

Zhu³

2021

Preprint

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“…Zero cash-flows to the creditors in case of default is a common assumption in the literature that models the illiquidity of a borrower; see e.g. [16,22,3]. In subsequent work [21], we extend the model to account for a positive liquidation value of the borrower.…”

Section: Creditors' Expected Payoff Under a Given Allocation Strategymentioning

confidence: 99%

When do creditors with heterogeneous beliefs agree to run?

Krishenik

Minca

Wissel³

2015

Finance Stoch

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This paper explores, in a multiperiod setting, the funding liquidity of a borrower that finances its operations through short-term debt. The short-term debt is provided by a continuum of creditors with heterogeneous beliefs about the prospects of the borrower. In each period, creditors observe the borrower's fundamentals and decide on the amount they invest in its short-term debt. We formalize this problem as a coordination game, and we show that there exists a unique reasonable Nash equilibrium. We show that the borrower is able to refinance if and only if the liquid net worth is above an illiquidity barrier, and we explicitly find this barrier in terms of the distribution of capital and beliefs across creditors.Keywords Liquidity risk · Credit risk · Nash equilibrium · Bank run Mathematics Subject Classification 91A10 · 91A13 · 91A20 · 91A80 · 91B69 · 91B70 JEL Classification C72 · C73 · D53 · D81 · G11 B A. Minca acm299@cornell.edu A. Krishenik

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Market Frictions and Corporate Finance: An Overview Paper

Cited by 2 publications

References 25 publications

Optimal Dividends under Markov-Modulated Bankruptcy Level

Optimal Dividends under Markov-Modulated Bankruptcy Level

When do creditors with heterogeneous beliefs agree to run?

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