IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v69y2020i1d10.1007_s00199-018-1160-6.html
   My bibliography  Save this article

Investment and financing in incomplete markets

Author

Listed:
  • Camelia Bejan

    (University of Washington, Bothell)

Abstract

I propose a model of production with incomplete financial markets, in which a firm can act as a financial innovator by issuing claims against its stock. In this environment, market value maximization may be against the firm’s shareholders’ interests. I propose instead a new measure of adjusted value, which is the sum between the market value and the shareholders’ surplus from their trades in the stock market. If a firm maximizes its adjusted value, then its financial policy is relevant (that is, Modigliani–Miller theorem does not hold), equilibrium outcomes are stable to shareholders’ renegotiation, and endogenously incomplete markets can arise at the equilibrium. If the firm is competitive, the adjusted value coincides with the objective proposed by Grossman and Hart (Econometrica 47(2):293–329, 1979). In a competitive market with no production-specific uninsurable risk (that is, spanning property holds), the adjusted value coincides with the market value.

Suggested Citation

  • Camelia Bejan, 2020. "Investment and financing in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(1), pages 149-182, February.
    • Handle: RePEc:spr:joecth:v:69:y:2020:i:1:d:10.1007_s00199-018-1160-6
    DOI: 10.1007/s00199-018-1160-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00199-018-1160-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00199-018-1160-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2002. "Nonexistence of Constrained Efficient Equilibria When Markets are Incomplete," Econometrica, Econometric Society, vol. 70(3), pages 1245-1251, May.
    3. Roy Radner, 1974. "A Note on Unanimity of Stockholders' Preferences among Alternative Production Plans: A Reformulation of the Ekern-Wilson Model," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 181-184, Spring.
    4. Allen, Franklin & Gale, Douglas, 1991. "Arbitrage, Short Sales, and Financial Innovation," Econometrica, Econometric Society, vol. 59(4), pages 1041-1068, July.
    5. Hart, Oliver D, 1979. "On Shareholder Unanimity in Large Stock Market Economies," Econometrica, Econometric Society, vol. 47(5), pages 1057-1083, September.
    6. Michael Zierhut, 2017. "Constrained efficiency versus unanimity in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(1), pages 23-45, June.
    7. Birgit Grodal & Egbert Dierker, 1999. "The price normalization problem in imperfect competition and the objective of the firm," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(2), pages 257-284.
    8. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
    9. Bonnisseau, Jean-Marc & Lachiri, Oussama, 2004. "On the objective of firms under uncertainty with stock markets," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 493-513, August.
    10. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    11. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    12. Camelia Bejan & Florin Bidian, 2012. "Ownership structure and efficiency in large economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 571-602, August.
    13. Hayne E. Leland, 1974. "Production Theory and the Stock Market," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 125-144, Spring.
    14. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2006. "Are Incomplete Markets Able to Achieve Minimal Efficiency?," Studies in Economic Theory, in: Christian Schultz & Karl Vind (ed.), Institutions, Equilibria and Efficiency, chapter 7, pages 117-129, Springer.
    15. 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.
    16. Simon, Leo K & Zame, William R, 1990. "Discontinuous Games and Endogenous Sharing Rules," Econometrica, Econometric Society, vol. 58(4), pages 861-872, July.
    17. Camelia Bejan, 2008. "The objective of a privately owned firm under imperfect competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(1), pages 99-118, October.
    18. Louis Makowski, 1983. "Competitive Stock Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 305-330.
    19. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
    20. Hart, Oliver D., 1974. "On the existence of equilibrium in a securities model," Journal of Economic Theory, Elsevier, vol. 9(3), pages 293-311, November.
    21. Michael Magill & Martine Quinzii & Jean‐Charles Rochet, 2015. "A Theory of the Stakeholder Corporation," Econometrica, Econometric Society, vol. 83(5), pages 1685-1725, September.
    22. Andrés Carvajal & Marzena Rostek & Marek Weretka, 2012. "Competition in Financial Innovation," Econometrica, Econometric Society, vol. 80(5), pages 1895-1936, September.
    23. Ostroy, Joseph M & Zame, William R, 1994. "Nonatomic Economies and the Boundaries of Perfect Competition," Econometrica, Econometric Society, vol. 62(3), pages 593-633, May.
    24. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    25. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marc Oliver Bettzüge & Thorsten Hens & Michael Zierhut, 2022. "Financial intermediation and the welfare theorems in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 457-486, April.
    2. Arturo Macias, 2022. "Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1418-1440, November.
    3. Alain Chateauneuf & Bernard Cornet, 2022. "Submodular financial markets with frictions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 721-744, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bejan, Camelia, 2008. "Production and financial decisions under uncertainty," MPRA Paper 11033, University Library of Munich, Germany.
    2. Douglas Gale & Piero Gottardi, 2017. "Equilibrium Theory of Banks' Capital Structure," CESifo Working Paper Series 6580, CESifo.
    3. Douglas Gale & Piero Gottardi, 2018. "A General Equilibrium Theory of Capital Structure," 2018 Meeting Papers 264, Society for Economic Dynamics.
    4. Gale, Douglas & Gottardi, Piero, 2020. "A general equilibrium theory of banks' capital structure," Journal of Economic Theory, Elsevier, vol. 186(C).
    5. Zierhut, Michael, 2019. "Nonexistence of constrained efficient production plans," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 127-136.
    6. Hervé Crès & Mich Tvede, 2013. "Production externalities: internalization by voting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 403-424, June.
    7. Luis H. B. Braido & V. Filipe Martins†da†Rocha, 2018. "Output Contingent Securities And Efficient Investment By Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 989-1012, May.
    8. Bisin, Alberto; & Gottardi, Piero; & Ruta, Guido, 2014. "Equilibrium corporate finance and intermediation," Economics Working Papers ECO2014/09, European University Institute.
    9. Michael Zierhut, 2017. "Constrained efficiency versus unanimity in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(1), pages 23-45, June.
    10. José Azar & Xavier Vives, 2018. "Oligopoly, Macroeconomic Performance, and Competition Policy," CESifo Working Paper Series 7189, CESifo.
    11. Alberto Bisin & Gian Luca Clementi & Piero Gottardi, 2014. "Capital Structure and Hedging Demand with Incomplete Markets," NBER Working Papers 20345, National Bureau of Economic Research, Inc.
    12. Jean-Marc Robin & Stéphane Bonhomme & Koen Jochmans, 2014. "Estimating Multivariate Latent-Structure Models," Sciences Po publications 2014-18, Sciences Po.
    13. Guido Ruta & Piero Gottardi, 2009. "Equilibrium corporate finance," 2009 Meeting Papers 149, Society for Economic Dynamics.
    14. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09ieq060086 is not listed on IDEAS
    15. Marc Oliver Bettzüge & Thorsten Hens & Michael Zierhut, 2022. "Financial intermediation and the welfare theorems in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 457-486, April.
    16. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(2), pages 221-254, February.
    17. Hervé Crès & Mich Tvede, 2001. "Proxy fights in incomplete markets: when majority voting and sidepayments are equivalent," Sciences Po publications 726/2001, Sciences Po.
    18. Danau, Daniel, 2020. "Prudence and preference for flexibility gain," European Journal of Operational Research, Elsevier, vol. 287(2), pages 776-785.
    19. Egbert Dierker, 2015. "A multiperiod Drèze rule," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 129-151, October.
    20. Michael Zierhut, 2021. "Indeterminacy of Cournot–Walras equilibrium with incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(1), pages 81-114, February.
    21. Azar, José, 2017. "Portfolio Diversification, Market Power, and the Theory of the Firm," IESE Research Papers D/1170, IESE Business School.

    More about this item

    Keywords

    Firm’s objective; Incomplete markets; Shareholder preferences; Financial innovation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:69:y:2020:i:1:d:10.1007_s00199-018-1160-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.