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Optimal dividend decisions with capital infusion in a dynamic nonterminal bankruptcy model

Author

Listed:
  • Shu Zhang

    (Southwest Jiaotong University)

  • Peimin Chen

    (BNU-HKBU United International College)

  • Chunchi Wu

    (State University of New York at Buffalo)

Abstract

We develop a stochastic dynamic model of dividend optimization under the conditions of a positive recovery, in which shareholders can recover a portion of their capital, and nonterminal bankruptcy due to private capital infusion or government bailout. In the presence of a recovery, the optimization problem becomes a mixed classical impulse stochastic control problem. We provide a closed-form solution for optimal dividend payout and timing under nonterminal bankruptcy. We take the model to the real data and show that this model explains the dividend puzzle during the financial crisis when the US government bailed out insurance companies and banks.

Suggested Citation

  • Shu Zhang & Peimin Chen & Chunchi Wu, 2024. "Optimal dividend decisions with capital infusion in a dynamic nonterminal bankruptcy model," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 911-951, April.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:3:d:10.1007_s11156-023-01229-1
    DOI: 10.1007/s11156-023-01229-1
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    More about this item

    Keywords

    Diffusion models; Optimal dividend policy; Nonterminal bankruptcy; Capital injection;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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