Optimal dividend policies with random profitability

Max Reppen, Jean Rochet and H. Mete Soner

Papers from arXiv.org

Abstract: We study an optimal dividend problem under a bankruptcy constraint. Firms face a trade-off between potential bankruptcy and extraction of profits. In contrast to previous works, general cash flow drifts, including Ornstein--Uhlenbeck and CIR processes, are considered. We provide rigorous proofs of continuity of the value function, whence dynamic programming, as well as comparison between the sub- and supersolutions of the Hamilton--Jacobi--Bellman equation, and we provide an efficient and convergent numerical scheme for finding the solution. The value function is given by a nonlinear PDE with a gradient constraint from below in one dimension. We find that the optimal strategy is both a barrier and a band strategy and that it includes voluntary liquidation in parts of the state space. Finally, we present and numerically study extensions of the model, including equity issuance and credit lines.

Date: 2017-06, Revised 2018-03
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Related works:
Journal Article: Optimal dividend policies with random profitability (2020)
Working Paper: Optimal dividend policies with random profitability (2020)
Working Paper: Optimal dividend policies with random profitability (2018)
Working Paper: Optimal dividend policies with random profitability (2018)
Working Paper: Optimal Dividend Policies with Random Profitability (2017)
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