Market Frictions and Corporate Finance: An Overview Paper

29 Pages Posted: 17 May 2014

See all articles by Santiago Moreno-Bromberg

Santiago Moreno-Bromberg

University of Zurich - Department of Banking and Finance

Jean-Charles Rochet

GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB)

Date Written: May 16, 2014

Abstract

We present an overview of corporate-finance models where firms are subject to exogenous market frictions. These models, albeit quite simple, yield reasonable predictions regarding financing, pay-outs and default, as well as asset-pricing implications. The price to pay for the said simplicity is the need to use non-standard mathematical techniques, namely Singular and Impulse Stochastic Control. We explore the cases where a firm with fixed expected profitability has access to costly equity issuance as a re financing possibility, and that where issuance is in finitely costly. We also present a model of bank leverage.

Keywords: Leverage, liquidity management, equity issuance, singular stochastic control, stochastic impulse control

Suggested Citation

Moreno-Bromberg, Santiago and Rochet, Jean-Charles, Market Frictions and Corporate Finance: An Overview Paper (May 16, 2014). Swiss Finance Institute Research Paper. Available at SSRN: https://ssrn.com/abstract=2437852 or http://dx.doi.org/10.2139/ssrn.2437852

Santiago Moreno-Bromberg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Jean-Charles Rochet

GFRI, University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

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