Shareholders' Unanimity with Incomplete Markets

SSRN Electronic Journal, 2017

We analyze competitive economies with risky investments. Unlike the classic Arrow-Debreu framing, firms and agents cannot contract upon the exogenous states underlying production risks. They can trade equities and any security written on the endogenous aggregate output. This financial structure is rich enough to promote efficient risk sharing among consumers. However, markets are incomplete from the production perspective, and the absence of prices for each primitive state of nature raises the question about the objective of firms. We show that output-contingent asset prices convey sufficient information to compute the competitive shareholder value that leads to efficient investment by firms.

Review of Economic Dynamics, 2003

We set up a dynamic model of firm investment in which liquidity constraints enter explicitly into the firm's maximization problem. The optimal policy rules are incorporated into a maximum likelihood procedure to estimate the structural parameters of the model. Investment is positively related to the firm's internal financial position when the firm is relatively poor. This relationship disappears for wealthy firms, which can reach their desired level of investment. Borrowing is an increasing function of financial position for poor firms. This relationship is reversed as a firm's financial position improves, and large firms hold little debt. We find that liquidity constraints matter significantly for the investment decisions of firms. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is about 6% higher over a period of 20 years. Transitory interest rate shocks have a sustained impact on capital accumulation, which lasts for several periods. for comments. Egon Zakrajsek gave useful advice on the data. We thank participants in seminars at the European University Institute in Florence, Hebrew University of Jerusalem, CEMFI, ITAM, SED 1999 and the Federal Reserve of Dallas for comments. We are also grateful to the editor of this journal and an anonymous referee for very useful suggestions. The responsibility for all errors is ours. Our emails: pratap@itam.mx, srendon@eco.uc3m.es.

1998

2009

We propose an objective for the firm in a model of production economies extending over time under uncertainty and with incomplete markets. We derive the objective of the firm from the assumption of initial-shareholders efficiency. Each shareholder is assumed to communicate to the firm her marginal valuation of profits at all future events (expressed in terms of initial resources). In defining her own marginal valuation of the firm's profits, a shareholder takes into consideration the direct impact of a change in the value of dividends but also the impact of future dividends on the firm's stock price when she trades shares. To predict the impact on the stock price, she uses a state price process, her price theory. The firm computes its own shadow prices for profits at all date-events by simply adding up the marginal valuations of all its initial shareholders. If no restrictions are placed on individual price theories, the existence of equilibria may require financial constraints on a firm's investment when its shareholders are more optimistic than the market about the profitability of such investment. We then impose that price theories be compatible with the observed equilibrium: they should satisfy a no-arbitrage condition. We show by means of an example that, with incomplete markets and no-short selling constraints, this restriction on price theories is not enough to bring consistency in the individuals' marginal evaluations: a financial constraint on the firm's investment may still be needed to obtain an equilibrium.

SSRN Electronic Journal, 2000

We consider securities markets in which economic interests in firms and shareholder voting rights are traded independently; such markets allow for "empty voters" who hold voting rights in a firm that exceed their economic interests. We demonstrate that, in such settings, competitive equilibria generally do not exist and may be inefficient even when they do exist. As the competitive equilibrium solution concept does not provide useful predictions in the presence of empty voting, we focus on cooperative game-theoretic "core outcomes." We show that core outcomes always exist, are always efficient, and can be reached from any initial allocation through voluntary trading; moreover, at a core outcome, agents have efficient incentives with regards to information revelation.

Review of Financial Studies, 2007

We solve a model with incomplete markets and heterogeneous agents that generates a large equity premium, while simultaneously matching stock market participation and individual asset holdings. The high risk premium is driven by incomplete risk sharing among stockholders, which results from the combination of borrowing constraints and (realistically) calibrated life-cycle earnings profiles, subject to both aggregate and idiosyncratic shocks.

Quantitative Finance, 2009

As a two-parameter model that satisfies stochastic dominance, the mean-extended Gini model is used to build efficient portfolios. The model also quantifies risk aversion heterogeneity in capital markets. Using a simple Edgeworth box framework, we show how capital market equilibrium is achieved for risky assets.

2003

Abstract: We develop a model of portfolio selection with subjective uncertainty and learning in order to explain why some people hold stocks while others don't. We model heterogeneity in information directly, which is an alternative to the existing explanations that emphasized heterogeneity in transaction costs of investment. We plan to calibrate the model to survey data (when available) on people's perception about the distribution of stock market returns.

Journal of Business Finance & Accounting, 1981

Journal of Political Economy, 2002