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Production and financial decisions under uncertainty

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  • Bejan, Camelia

Abstract

This paper proposes a model of an incomplete markets economy with pro- duction, in which the firm acts as financial innovator by issuing claims against its stock. The firm’s objective is to maximize its adjusted value, which is the sum of the market value and the shareholders’ surplus from their trades in the stock markets. If a firm maximizes its adjusted value, then its financial policy is relevant (i.e., Modigliani-Miller theorem does not hold), equilibrium outcomes are stable to shareholders’ renegotiation and endogenously incomplete markets typically arise at the equilibrium. If the firm is competitive in the financial markets, the adjusted value coincides with the Grossman-Hart objective.

Suggested Citation

  • Bejan, Camelia, 2008. "Production and financial decisions under uncertainty," MPRA Paper 11033, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11033
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    References listed on IDEAS

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    Cited by:

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    2. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.

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    More about this item

    Keywords

    firm’s objective; incomplete markets; shareholder preferences;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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