The Mean-Variance Synthesis Of Corporate Balance Sheets

This paper studies the corporate financial policy of minimizing the risk of a large loss. The implications of this policy are examined using a mean-variance risk model. The model creates mean-variance efficient balance sheets featuring the minimum equity risk for a target level of earnings. The model offers unambiguous decisions on the firm's capital structure, investing, financing, dividend policy, mergers and acquisitions. The implications of the model agree with empirical evidence. The paper suggests that capital structure and dividend decisions, that are irrelevant in a Modigliani–Miller market from the valuation viewpoint, are relevant for corporate risk management.