Learning about profitability and dynamic cash management

Jean-Paul Décamps and Stéphane Villeneuve ()
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Stéphane Villeneuve: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We study a dynamic model of a firm whose shareholders learn about its profitability, face costs of external nancing and costs of holding cash. The shareholders' problem involves a notoriously challenging singular stochastic control problem with a two-dimensional degenerate diffusion process. We solve it by means of an explicit construction of its value function, and derive a corporate life-cycle with two stages: a "probation stage" where it is never optimal for the firm to issue new shares, and a "mature stage" where the firm resorts to the market whenever needed. The cash target level is non-monotonic in the belief about the profitability and reaches its highest value on the edge between the two stages. It follows new insights on the firm's volatility and its payout ratio which depend on the firm's stage in its life cycle.

Keywords: Corporate cash management; Corporate life cycle; Learning; Singular control (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-dge
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Published in Journal of Economic Theory, 2022, 205, pp.105522. ⟨10.1016/j.jet.2022.105522⟩

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Journal Article: Learning about profitability and dynamic cash management (2022)
Working Paper: Learning about profitability and dynamic cash management (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04164661

DOI: 10.1016/j.jet.2022.105522

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