Learning about profitability and dynamic cash management

Jean-Paul Décamps and Stéphane Villeneuve

No 22-1301, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We study a dynamic model of a rm whose shareholders learn about its profitability, face costs of external nancing and costs of holding cash. The shareholders' problem involves a notoriously challenging singular stochastic control problem with a two-dimensional degenerate diffusion process. We solve it by means of an explicit construction of its value function, and derive a corporate life-cycle with two stages: a "probation stage" where it is never optimal for the firm to issue new shares, and a "mature stage" where the firm resorts to the market whenever needed. The cash target level is non-monotonic in the belief about the profitability and reaches its highest value on the edge between the two stages. It follows new insights on the firm's volatility and its payout ratio which depend on the firm's stage in its life cycle.

Keywords: Corporate cash management; Corporate life cycle; Learning; Singular control (search for similar items in EconPapers)
JEL-codes: C02 C11 C61 G32 G33 G35 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-cwa, nep-dge and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:126577

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