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Investment and financing in incomplete markets

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  • 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
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    References listed on IDEAS

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    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. 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.
    3. Bejan, Camelia, 2024. "On the shareholders versus stakeholders debate," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 68-88.
    4. 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.
    5. Michael Zierhut & Chiaki Hara, 2025. "Shareholder Unanimity: A Survey from the Viewpoint of Incomplete Markets," KIER Working Papers 1112, Kyoto University, Institute of Economic Research.

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    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

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