Dynamic Optimal Risk Management and Dividend Policy

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1、DynamicOptimalRiskManagementandDividendPolicyunderOptimalCapitalStructureandMaturitybyMichaelP.RossHaasSchoolofBusinessUniversityofCalifornia,BerkeleyFall1997AbstractThispaperexaminestheinteractionbetweenarm'svolatilityanddividendpoli-ciesandcapitalstructu

2、reandmaturitypolicies.Thermispermittedtocostlesslyandcontinuouslyselectanyassetvolatilityanddividendyield,withinbounds.Simpleandintuitiverulesarederivedfortherm'soptimaldividendandvolatilitychoices.Itisfoundthatthermalwaysoptimallyselectseitherthemaximal

3、orminimaldiv-idendyieldandassetvolatilityandthatthesedecisionsdepend,respectively,onlyuponthedeltaandgammaoftherm'sequity.Theseoptimaldividendandvolatil-itypoliciesarethenimplementedwithinthecontextoftheLelandandToft(1996)capitalstructuremodel.Itisfoundtha

4、trmswilloptimallyselectalowdividendyieldandalowassetvolatilityoveragreaterrangeofrmassetvaluestheshorteristhematurityoftherm'sdebt.Anticipatingthisbehavior,bondholderswilldemandasmallercreditspreadforshort-termdebtwhenthermhasgreatleewayinchoosingitsass

5、etvolatility.Inturn,thismayinducearmtooptimallyissueshort-termdebt.Itisalsofoundthatthebetterisarm'sabilitytohedge,themorefrequentlyitwillrefrainfrompayingdividends.Thisconrmsthewell-knownresultthatriskmanage-mentmitigatesincentivesforunderinvestment.Her

6、eitisshowntoapplyex-postaswellasex-ante.TheauthorwishestothankYuriBurlakov,AaronEdlin,NengjiuJu,HayneLelandandRichardMartin.Anyerrorsremainmyown.1IntroductionTherearethreetypesofcorporatenancialdecisionsthathavelongbeenofinteresttonancialeconomists.Thesea

7、redecisionsregardingleverage,dividendsandrisk.SinceJensenandMeckling'sseminalworkintroducedtheconceptofassetsubstitution,ithasbeenacknowledgedthatleveredrmsmaywishtoundertakerisksinordertoexpropriatevaluefrombondholdersforthebenetofstockholders.WorkbyDiam

8、ond(1989),CampbellandKracaw(1990)andLelandandToft(1996)hasintroducedthenotionthatmanagement,actinginthebestinterestofshareholders,maywishtolimitassetsubstitution.Butoptimalvolatilitychoicehasneverbeenc