The aim of the Special Issue is to address some of the main challenges individuals and companies face in managing financial and actuarial risks, when dealing with their investment/retirement or business-related decisions [...]
We model a risk-averse firm owner who wants to maximize the intertemporal expected utility of firm's dividends. The optimal dynamic control problem is characterized by two stochastic state variables: the equity value, and profitability (ROA) of the _rm. According to the empirical evidence, we let profitability follow a mean reverting process. The problem is solved in a quasiexplicit form by computing both the optimal dividend and the optimal debt. Finally, we calibrate the model to actual US data and check both the properties of the solution and its sensitivity to the model parameters. In particular, our results show that the optimal dividend is smooth over time and that leverage is predominantly constant over time. Neither asymmetric information nor frictions are necessary to obtain these findings.
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