Control of Dividends, Capital Subscriptions, and Physical Inventories

32 Pages Posted: 8 Apr 2005

See all articles by Lode Li

Lode Li

Yale School of Management

Martin Shubik

Yale University - School of Management; Yale University - Cowles Foundation

Matthew J. Sobel

Case Western Reserve University; Weatherhead School of Management, Case Western Reserve University

Date Written: February 2005

Abstract

Business organizations are faced with the financial and physical task of managing interrelated flows of material and cash. Material needs capital, and on the other hand, when finished goods are sold, they contribute to cash reserves. In this paper, we present and study a dynamic model in which inventory and financial decisions are made simultaneously and interact directly with each other in the presence of demand uncertainty and financial constraints. The criterion is to maximize the expected present value of dividends net of capital subscriptions. We establish conditions which imply that the optimal values of dividends, capital subscriptions, material procurement, and short term borrowing are nondecreasing functions of the levels of inventory and retained earnings. We establish that the optimal policy is myopic and explicitly characterized for a special and important case where both inventory costs and default penalties are linear. As a consequence, the optimal base-stock inventory level should be lower in a dividend-maximizing firm than in a profit-maximizing firm.

Keywords: Dividends, Capital Subscription, Loans, Inventory, Default Penalty, Bankruptcy

JEL Classification: C61, D24, G32, G33, M11

Suggested Citation

Li, Lode and Shubik, Martin and Sobel, Matthew J. and Sobel, Matthew J., Control of Dividends, Capital Subscriptions, and Physical Inventories (February 2005). Available at SSRN: https://ssrn.com/abstract=690864 or http://dx.doi.org/10.2139/ssrn.690864

Lode Li (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Martin Shubik

Yale University - School of Management ( email )

Box 208200
New Haven, CT 06520-8200
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3694 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://cowles.econ.yale.edu/P/au/d_shubik.htm

Matthew J. Sobel

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

HOME PAGE: http://https://weatherhead.case.edu/faculty/emeriti-faculty/matthew-sobel

Weatherhead School of Management, Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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