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A class of solvable stochastic dividend optimization problems: on the general impact of flexibility on valuation

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  • Luis Alvarez

    ()

  • Jukka Virtanen

    ()

Abstract

We consider the determination of an optimal dividend policy in the presence of cash flow uncertainty and transaction costs. We state a set of weak conditions under which the optimal dividend policy can be explicitly characterized for a broad class of diffusions modelling the underlying cash flow dynamics and demonstrate that increased dividend policy flexibility does not only increase the maximal expected cumulative present value of the future dividends, it also increases the rate at which this value grows (i.e. Tobin’s marginal q). We also prove that increased transaction costs result into larger but less frequent dividend payments. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-005-0627-4
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 28 (2006)
Issue (Month): 2 (06)
Pages: 373-398

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Handle: RePEc:spr:joecth:v:28:y:2006:i:2:p:373-398

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Related research

Keywords: Optimal dividends; Cash flow uncertainty; Liquidation; Stochastic impulse and singular control.;

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Cited by:
  1. Shackleton, Mark B. & Sødal, Sigbjørn, 2010. "Harvesting and recovery decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2533-2546, December.
  2. Pekka Matomäki, 2012. "On solvability of a two-sided singular control problem," Computational Statistics, Springer, vol. 76(3), pages 239-271, December.
  3. Erhan Bayraktar & Masahiko Egami, 2007. "The Effects of Implementation Delay on Decision-Making Under Uncertainty," Papers math/0703833, arXiv.org.
  4. Alvarez, Luis H.R. & Koskela, Erkki, 2007. "Optimal harvesting under resource stock and price uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2461-2485, July.
  5. Florin Avram & Zbigniew Palmowski & Martijn R. Pistorius, 2011. "On Gerber-Shiu functions and optimal dividend distribution for a L\'{e}vy risk-process in the presence of a penalty function," Papers 1110.4965, arXiv.org, revised Mar 2014.
  6. Yiannis Kamarianakis & Anastasios Xepapadeas, 2006. "Controlling the risky fraction process with an ergodic criterion," Working Papers 0710, University of Crete, Department of Economics.
  7. Luis H. R. Alvarez & Teppo A. Rakkolainen, 2007. "Optimal Dividend Control in Presence of Downside Risk," Discussion Papers 14, Aboa Centre for Economics.
  8. Zhu, Jinxia & Chen, Feng, 2013. "Dividend optimization for regime-switching general diffusions," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 439-456.
  9. Alvarez, Luis H.R., 2011. "Optimal capital accumulation under price uncertainty and costly reversibility," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1769-1788, October.
  10. Yiannis Kamarianakis & Anastasios Xepapadeas, 2006. "An irreversible investment model with a stochastic production capacity and fixed plus proportional adjustment costs," Working Papers 0708, University of Crete, Department of Economics.
  11. Luis Alvarez & Teppo Rakkolainen, 2009. "Optimal payout policy in presence of downside risk," Computational Statistics, Springer, vol. 69(1), pages 27-58, March.

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