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Liquidity management with decreasing returns to scale and secured credit line

Author

Listed:
  • Erwan Pierre

    (EDF Lab Paris-Saclay)

  • Stéphane Villeneuve

    (Toulouse School of Economics (CRM-IDEI))

  • Xavier Warin

    (Laboratoire de Finance des Marchés de l’Energie)

Abstract

This paper examines the dividend and investment policies of a cash constrained firm, assuming a decreasing-returns-to-scale technology and adjustment costs. We extend the literature by allowing the firm to draw on a secured credit line both to hedge against cash-flow shortfalls and to invest/disinvest in a productive asset. We formulate this problem as a two-dimensional singular control problem and use both a viscosity solution approach and a verification technique to get qualitative properties of the value function. We further solve quasi-explicitly the control problem in two special cases.

Suggested Citation

  • Erwan Pierre & Stéphane Villeneuve & Xavier Warin, 2016. "Liquidity management with decreasing returns to scale and secured credit line," Finance and Stochastics, Springer, vol. 20(4), pages 809-854, October.
    • Handle: RePEc:spr:finsto:v:20:y:2016:i:4:d:10.1007_s00780-016-0312-4
    DOI: 10.1007/s00780-016-0312-4
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    References listed on IDEAS

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    2. Etienne Chevalier & Vathana Ly Vath & Alexandre Roch, 2020. "Optimal Dividend and Capital Structure with Debt Covenants," Journal of Optimization Theory and Applications, Springer, vol. 187(2), pages 535-565, November.
    3. Salvatore Federico & Giorgio Ferrari & Patrick Schuhmann, 2019. "A Model for the Optimal Management of Inflation," Department of Economics University of Siena 812, Department of Economics, University of Siena.

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    More about this item

    Keywords

    Investment; Dividend policy; Singular control; Viscosity solution;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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