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SUMMARY:Tobin’s Q and Optimal Dividends\, Investment\, and Liquidity in 
 a Financially-Constrained Firm
DTSTART:20180525T103000
DTEND:20180525T120000
DTSTAMP:20260916T044007Z
UID:5a0ff972a7f689668afa7bde7cac617c7ba19d50e2b7b379e311644a
CATEGORIES:Conferences - Seminars
DESCRIPTION:Andrew B. ABEL (Wharton\, University of Pennsylvania)\nWe ana
 lyze the payout decision of a financially-constrained firm that cannot rai
 se external funds. Exogenous cash flows are generated by a two-state Marko
 v regime-switching process and are positive in one regime and negative in 
 the other regime. The firm is motivated to pay out dividends to impatient 
 shareholders but is also motivated to accumulate cash within the firm to m
 ake required payments when cash flow is negative. If the cash on hand is i
 nsufficient to make these payments\, the firm terminates\, thereby losing 
 its claim on future cash flows. The optimal payout policy can be described
  as a form of precautionary saving. However\, contrary to conventional wis
 dom about precautionary saving\, we find that such saving falls in respons
 e to a mean-preserving increase in the variance of cash flows.\n \nWe ext
 end the model to include a capital investment decision. Instead of smooth 
 and convex adjustment costs\, we introduce an upper bound on the investmen
 t-capital ratio\, which leads to a bang-bang solution for investment. Thus
  optimal investment and dividends are each governed by trigger policies. W
 e derive and interpret analytic solutions for these triggers. The trigger 
 for optimal investment equates marginal q to the "static cost of funds\," 
 which is technically the marginal valuation of a dollar of cash within the
  firm. Despite the linear homogeneity of the value function in the state v
 ariables (capital and cash on hand)\, average q and marginal q are not equ
 al. At the optimal trigger for investment\, a broader measure of average q
 \, equal to the value of the firm divided by the sum of the replacement co
 st of its capital and its cash on hand\, equals marginal q. Finally\, we a
 nalyze a particular myopic value of a unit of capital\, and show that if t
 his myopic value of capital is sufficiently high\, specifically when the m
 yopic value exceeds one\, the firm can ignore the financing constraint whe
 n making its investment decision. Otherwise\, the firm will invest in capi
 tal only if its cash on hand is greater than or equal to an optimally-deri
 ved trigger.
LOCATION:UNIL\, Extranef\, room 126 https://planete.unil.ch/plan/?local=EX
 T-126
STATUS:CONFIRMED
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