AbstractThis paper studies a model of corporate finance in which firms use stock issuance to finance investment. In contrast to the existing literature, we assume that the firm is "rational" and therefore recognizes the relationship between future dividends and stock prices. Under this assumption, future variables enter in the constraints of the firm, so that the problem is not recursive in a standard sense and the Bellman equation does not hold. This implies that the model has to be solved with recursive contracts methods such as the ones used, for example, in models of optimal macroeconomic policy or in risk sharing models with participation constraints. In addition, financial policy may be time inconsistent. First, we characterize several cases where time consistency arises. Second, we compare numerically the full commitment (and potentially time inconsistent) solution of a "rational" firm to the one of a "naive" firm that ignores the relationship between current price and future dividends. First, our results suggest that growing firms will pay lower dividends at the beginning and promise higher dividends in the future. This allows them to raise cheaper external funds through a higher value of stocks, accumulate more capital, and grow faster.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 954.
Date of creation: 2008
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
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.:
- S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002.
"Optimal Taxation without State-Contingent Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 110(6), pages 1220-1254, December.
- Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
- Francisco Covas & Wouter Denhaan, 2006.
"The role of debt and equity finance over the business cycle,"
2006 Meeting Papers
407, Society for Economic Dynamics.
- Francisco Covas & Wouter J. Den Haan, 2012. "The Role of Debt and Equity Finance Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 122(565), pages 1262-1286, December.
- Francisco Covas & Wouter J. den Haan, 2006. "The Role of Debt and Equity Finance over the Business Cycle," Working Papers 06-45, Bank of Canada.
- Covas, Francisco & Den Haan, Wouter, 2007. "The Role of Debt and Equity Finance over the Business Cycle," CEPR Discussion Papers 6145, C.E.P.R. Discussion Papers.
- Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
- Vincenzo Quadrini & Urban Jermann, 2005. "Financial Development and Macroeconomic Stability," 2005 Meeting Papers 692, Society for Economic Dynamics.
- Albert Marcet & Ramon Marimon, 2011.
CEP Discussion Papers
dp1055, Centre for Economic Performance, LSE.
- Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," Working Papers 552, Barcelona Graduate School of Economics.
- Marcet, A. & Marimon, R., 1998. "Recursive Contracts," Economics Working Papers eco98/37, European University Institute.
- Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," Economics Working Papers ECO2011/15, European University Institute.
- Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.