Optimal dividend and issuance of equity policies in the presence of proportional costs

Arne Løkka and Mihail Zervos

Insurance: Mathematics and Economics, 2008, vol. 42, issue 3, 954-961

Abstract: We consider three optimisation problems faced by a company that can control its liquid reserves by paying dividends and by issuing new equity. The first of these problems involves no issuance of new equity and has been considered by several authors in the literature. The second one aims at maximising the expected discounted dividend payments minus the expected discounted costs of issuing new equity over all strategies associated with positive reserves at all times. The third problem has the same objective as the second one, but with no constraints on the reserves. Assuming proportional issuance of equity costs, we derive closed form solutions and we completely characterise the optimal strategies. We also provide a relationship between the three problems.

Date: 2008
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