Abstract: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 bot… Show more
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