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Abstract: Corporate Financial Strategies under Uncertainty: Valuation and Policies in Dynamic Disequilibrium

Published online by Cambridge University Press:  06 April 2009

Carl W. Hamilton
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Extract

Dynamic policies for corporate finance have mostly been studied under conditions of certainty. Financial optimal control models (Davis [3], Krouse [5], Inselbag [4], and Senchack [7]) are characterized by time-varying, state-dependent policy formulations: when and to what extent should earnings retention, borrowing, and debt repayment, new stock issues, and capital investment be varied over an extended planning horizon. Optimal policies generated by these (and other) dynamic deterministic models tend to exhibit a bang-bang phenomenon: switching instantaneously from one extreme to another in a managerially unpalatable way. Dividends are either nonexistent or all of net earnings; borrowing is either absent or at the limit of what banks and the bond market will allow. This sort of policy behavior is acceptable only in a completely deterministic world. Investors would tolerate such extremes since they know that their share, when it finally comes and even after discounting, would still be larger than by any other policy. However, with uncertainty, a balance between dividends now and capital gains later must be struck which will better satisfy investor preferences.

Type
VII. Financial Planning
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 4 , November 1978 , pp. 779 - 781
Copyright
Copyright © School of Business Administration, University of Washington 1978

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References

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