Three essays on corporate finance modelling

Abstract

In this thesis I use mathematical modelling techniques to further our understanding of three outstanding corporate finance problems. In each case, I derive a novel model of agent behaviour, calculate an efficient numerical solution, and then explore how the model informs theory and practice. I present my contributions to each problem as separate selfcontained essays. In my third essay I derive a global asset pricing model with endogenous home preference that contains a small open economy with a dividend imputation tax system; Dividend imputation eliminates double taxation by attaching tax credits to distributed dividends for already paid company tax. Domestic investors can use these credits to reduce their personal taxes, while credits are useless to foreign investors. The interplay between imputation eligible domestic investors and ineligible foreign investors makes it difficult to value imputation credits. My model assumes that home bias arises endogenously from the status quo and endowment effect behavioural biases. I find that these biases interact with dividend imputation to drive domestic investors to hold highly concentrated domestic portfolios. I also find that risk-averse domestic investors cannot fully capture the value of imputation credits because concentrating their holdings in the domestic market reduces their diversification.