Financial Policies and Internal Governance with Heterogeneous Risk Preferences

55 Pages Posted: 2 Aug 2019

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

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

Shiqi Chen

University of Cambridge

Date Written: July 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 has a strictly concave (convex) claim on the firm's net worth. For intermediate risk preferences investors' claim is S-shaped, resembling preferred stock. We derive investors' utility weights absent wealth distribution and under social optimization.

Keywords: governance, Group decisions, investment, Payout, Risk Preference

Suggested Citation

Lambrecht, Bart and Chen, Shiqi, Financial Policies and Internal Governance with Heterogeneous Risk Preferences (July 2019). CEPR Discussion Paper No. DP13888. Available at SSRN: https://ssrn.com/abstract=3428412

Bart Lambrecht

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

Shiqi Chen (Contact Author)

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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