Optimal dividend decisions with capital infusion in a dynamic nonterminal bankruptcy model

Shu Zhang (), Peimin Chen () and Chunchi Wu ()
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Shu Zhang: Southwest Jiaotong University
Peimin Chen: BNU-HKBU United International College
Chunchi Wu: State University of New York at Buffalo

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 3, No 3, 951 pages

Abstract: Abstract We develop a stochastic dynamic model of dividend optimization under the conditions of a positive recovery, in which shareholders can recover a portion of their capital, and nonterminal bankruptcy due to private capital infusion or government bailout. In the presence of a recovery, the optimization problem becomes a mixed classical impulse stochastic control problem. We provide a closed-form solution for optimal dividend payout and timing under nonterminal bankruptcy. We take the model to the real data and show that this model explains the dividend puzzle during the financial crisis when the US government bailed out insurance companies and banks.

Keywords: Diffusion models; Optimal dividend policy; Nonterminal bankruptcy; Capital injection (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-023-01229-1

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