Raising and allocation capital principles as optimal managerial contracts

Fernando Mierzejewski

Scandinavian Actuarial Journal, 2013, vol. 2013, issue 1, 24-48

Abstract: A unified framework is presented to characterise the capital structure of firms that face borrowing restrictions – which extends the classic theory of capital by incorporating elements from actuarial and agency theory. It is demonstrated that the bankruptcy and agency costs afforded by these firms can be expressed in terms of the actuarial prices of the underlying exposures. Then the optimal surplus is determined in order to maximise value – which is equivalent to minimise the cost of bankruptcy plus the opportunity cost of capital. The capital principle thus obtained explicitly depends on risk and expectations, and can be applied to allocate reserves both in financial and insurance companies. An optimal decentralised mechanism is also defined that stimulates the exchange of information inside multidivisional corporations.

Date: 2013
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DOI: 10.1080/03461238.2010.540154

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