Financial Policies and Internal Governance with Heterogeneous Risk Preferences

54 Pages Posted: 6 Apr 2019 Last revised: 30 Oct 2019

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: October 24, 2019

Abstract

We consider a group of investors with heterogeneous risk preferences that determines a firm's investment policy, and each investor's compensation function. 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 (busts), reconciling the diversification of opinions hypothesis and the group shift hypothesis. The most (least) risk averse investor receives a strictly concave (convex) claim on the firm's net worth. For intermediate risk preferences investors' claim is S-shaped, resembling preferred stock. We endogenize investors' utility weights absent wealth redistribution, and under social optimization.

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

JEL Classification: G32, G34, G35

Suggested Citation

Chen, Shiqi and Lambrecht, Bart, Financial Policies and Internal Governance with Heterogeneous Risk Preferences (October 24, 2019). 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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