The Dynamics of Financial Policies and Group Decisions in Private Firms

57 Pages Posted: 6 Apr 2019 Last revised: 12 Apr 2021

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: March 27, 2020

Abstract

We model a private firm founded and run by a group of investors with heterogeneous capital contributions and risk preferences who decide on the firm's financial policies and governance. Investors' optimal claims resemble preferred stock with heterogeneous dividend caps, and common stock. Cashflow rights and control rights are separated and time-varying. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (recessions). Optimal leverage is procyclical. The dynamic financial policies and diversity in equity claims resolve investors' diverging preferences and inability to trade.

Keywords: group decisions, investment, payout, risk preference, governance

JEL Classification: G32, G34, G35

Suggested Citation

Chen, Shiqi and Lambrecht, Bart, The Dynamics of Financial Policies and Group Decisions in Private Firms (March 27, 2020). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
146
Abstract Views
880
rank
236,590
PlumX Metrics