Optimal investment and endogenous payout strategy with time inconsistency
| Autor: | Yehong Yang, Guo‐Hua Cao |
|---|---|
| Rok vydání: | 2019 |
| Předmět: |
Economics and Econometrics
050208 finance media_common.quotation_subject 05 social sciences Enterprise value Monetary economics Investment (macroeconomics) Time-inconsistent preferences Accounting Cash 0502 economics and business Economics Dynamic inconsistency External financing Asset (economics) 050207 economics Hedge (finance) Finance media_common |
| Zdroj: | International Journal of Finance & Economics. 26:707-723 |
| ISSN: | 1099-1158 1076-9307 |
| DOI: | 10.1002/ijfe.1812 |
| Popis: | This study extends the classical model to focus on a firm's optimal investment and endogenous payout strategies when a manager has time‐inconsistent preferences, which we describe by a quasi‐hyperbolic discount function. We attempt to reveal the impacts of time‐inconsistency on liquidation, external financing, credit lines, and risk management. The extended model predicts that the time‐inconsistent manager tends to (a) pay out cash to shareholders earlier by lowering the dividend payment, which causes the firm to hold less cash reserves and raise less equity; (b) invest less in the high cash and engage in much less costly asset sales in the low cash; and (c) choose not to hedge earlier than a time‐consistent counterpart. In addition, our model also shows that the manager's time‐inconsistent preferences decrease firm value and the marginal value of cash. These results highlight that corporate decisions, including payouts, cash holdings, investment, external financing, and even risk management strategies, are highly dependent on the manager's time‐inconsistent preferences. |
| Databáze: | OpenAIRE |
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