Optimal Financial Policies for a Group

48 Pages Posted: 6 Apr 2019 Last revised: 10 Jun 2022

See all articles by Shiqi Chen

Shiqi Chen

University of Cambridge - Judge Business School

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Date Written: 09 06, 2022

Abstract

We model the financial policies of a private firm owned by a group of undiversified investors with heterogeneous capital contributions and risk preferences. The first-best expected life-time utility for each investor can be achieved by issuing financial claims resembling preferred stock with heterogeneous dividend caps and common stock, and by following procyclical investment and financing policies. These optimal financial policies and claims can be derived as the solution to a social planner problem that maximizes a weighted average of investors' life-time utility. Investors' utility weights are fixed at startup and determined by their participation constraints.

Keywords: investment, payout, capital structure, risk preferences, group policy

JEL Classification: G32, G34, G35

Suggested Citation

Chen, Shiqi and Lambrecht, Bart, Optimal Financial Policies for a Group (09 06, 2022). Available at SSRN: https://ssrn.com/abstract=3351802 or http://dx.doi.org/10.2139/ssrn.3351802

Shiqi Chen

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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