Firm behavior under threat of liquidation

Article Abstract:

The strategies of firms facing the risk of liquidation if the cash reserve drops below a predetermined level is considered. The problem requires balancing the need to pay shareholder dividends and the need to maintain cash reserves with the goal of maximizing the expected discounted value of dividends. Using the optimal control of continuous time diffusion process theory, it is shown that such firms raise capital costs and exhibit local risk-aversion due to financial constraints.

Liquidity (Finance)

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Risk vs. profit potential: a model for corporate strategy

Article Abstract:

The operating strategies of firms facing uncertain net revenue and the threat of bankruptcy are examined. The problem involves maximizing the expected total discounted dividends within a certain time period to derive the optimal policy. The latter, which assumes that the firm's cash reserves are equal to the difference between the cumulative net revenue and cumulative dividends, prohibits firms from paying dividends if the reserve falls below a predetermined level.

Economics, Brownian motion

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Profit maximization with bankruptcy and variable scale

Article Abstract:

A diffusion model of a firm with variable scale showed that conditions are determined for profit maximization that can lead almost definitely to bankruptcy. The model also showed that the withdrawal rate is zero when the asset level is lower than a "barrier." However, the withdrawal rate is the same as the maximum rate when the asset level is the same as the barrier.

Financial Management, Management, Profit, Profits, Bankruptcy

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