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Production and financial decisions under uncertainty

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Author Info
Bejan, Camelia

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

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
G20 - Financial Economics - - Financial Institutions and Services - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Camelia Bejan, 2008. "The objective of a privately owned firm under imperfect competition," Economic Theory, Springer, vol. 37(1), pages 99-118, October. [Downloadable!] (restricted)
  2. Grossman, Sanford J & Hart, Oliver D, 1979. "A Theory of Competitive Equilibrium in Stock Market Economies," Econometrica, Econometric Society, vol. 47(2), pages 293-329, March. [Downloadable!] (restricted)
    Other versions:
  3. Hayne E. Leland, 1974. "Production Theory and the Stock Market," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 125-144, Spring. [Downloadable!] (restricted)
    Other versions:
  4. Simon, Leo K & Zame, William R, 1990. "Discontinuous Games and Endogenous Sharing Rules," Econometrica, Econometric Society, vol. 58(4), pages 861-72, July. [Downloadable!] (restricted)
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  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, vol. 5(1), pages 171-180, Spring. [Downloadable!] (restricted)
  6. Gerard Debreu, 1961. "New Concepts and Techniques for Equilibrium Analysis," Cowles Foundation Discussion Papers 129, Cowles Foundation, Yale University. [Downloadable!]
  7. Makowski, Louis, 1983. "Competitive Stock Markets," Review of Economic Studies, Blackwell Publishing, vol. 50(2), pages 305-30, April. [Downloadable!] (restricted)
  8. Jean-Marc Bonnisseau & Oussama Lachiri, 2004. "On the objective of firms under uncertainty with stock markets," Cahiers de la Maison des Sciences Economiques b04122, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
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  9. 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. [Downloadable!] (restricted)
  10. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2002. "Are Incomplete Markets Able to Achieve Minimal Efficiency?," Discussion Papers 03-09, University of Copenhagen. Department of Economics. [Downloadable!]
  11. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto. [Downloadable!]
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