Financial Policies and Internal Governance with Heterogeneous Risk Preferences

Bart Lambrecht and Shiqi Chen

No 13888, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We consider a group of investors with heterogeneous risk preferences that determines a firm's investment policy, and each investor's compensation function. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (busts), reconciling the diversification of opinions hypothesis and the group shift hypothesis. The most (least) risk averse investor has a strictly concave (convex) claim on the firm's net worth. For intermediate risk preferences investors' claim is S-shaped, resembling preferred stock. We derive investors' utility weights absent wealth distribution and under social optimization.

Keywords: Group decisions; investment; Payout; Risk preference; Governance (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cfn and nep-upt
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