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Production and financial decisions under uncertainty

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  • Bejan, Camelia

Abstract

This paper proposes a model of an incomplete markets economy with pro- duction, in which the firm acts as financial innovator by issuing claims against its stock. The firm’s objective is to maximize its adjusted value, which is the sum of the market value and the shareholders’ surplus from their trades in the stock markets. If a firm maximizes its adjusted value, then its financial policy is relevant (i.e., Modigliani-Miller theorem does not hold), equilibrium outcomes are stable to shareholders’ renegotiation and endogenously incomplete markets typically arise at the equilibrium. If the firm is competitive in the financial markets, the adjusted value coincides with the Grossman-Hart objective.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11033.

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Date of creation: 03 Jan 2008
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Handle: RePEc:pra:mprapa:11033

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Keywords: firm’s objective; incomplete markets; shareholder preferences;

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References

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  1. Simon, Leo K. & Zame, William R., 1987. "Discontinous Games and Endogenous Sharing Rules," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt8n46v2wv, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2005. "Are incomplete markets able to achieve minimal efficiency?," Economic Theory, Springer, Springer, vol. 25(1), pages 75-87, 01.
  3. Hayne E. Leland, 1974. "Production Theory and the Stock Market," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 5(1), pages 125-144, Spring.
  4. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 82(1), pages 19-45, September.
  5. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
  6. Sanford Grossman & Oliver Hart, 1978. "A theory of competitive equilibrium in stock market economies," Special Studies Papers 115, Board of Governors of the Federal Reserve System (U.S.).
  7. Birgit Grodal & Egbert Dierker, 1999. "The price normalization problem in imperfect competition and the objective of the firm," Economic Theory, Springer, Springer, vol. 14(2), pages 257-284.
  8. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2002. "Nonexistence of Constrained Efficient Equilibria When Markets are Incomplete," Econometrica, Econometric Society, Econometric Society, vol. 70(3), pages 1245-1251, May.
  9. Camelia Bejan, 2008. "The objective of a privately owned firm under imperfect competition," Economic Theory, Springer, Springer, vol. 37(1), pages 99-118, October.
  10. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  11. Jean-Marc Bonnisseau & Oussama Lachiri, 2004. "On the objective of firms under uncertainty with stock markets," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) b04122, Université Panthéon-Sorbonne (Paris 1).
  12. LeRoy,Stephen F. & Werner,Jan, 2001. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521586054.
  13. Kelsey, David & Milne, Frank, 1996. "The existence of equilibrium in incomplete markets and the objective function of the firm," Journal of Mathematical Economics, Elsevier, vol. 25(2), pages 229-245.
  14. Gerard Debreu, 1961. "New Concepts and Techniques for Equilibrium Analysis," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 129, Cowles Foundation for Research in Economics, Yale University.
  15. Makowski, Louis, 1983. "Competitive Stock Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(2), pages 305-30, April.
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Cited by:
  1. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer, Springer, vol. 46(2), pages 221-254, February.
  2. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks, Collegio Carlo Alberto 60, Collegio Carlo Alberto.

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