Learning about profitability and dynamic cash management

Résumé

We study a dynamic model of a firm 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.

Mots-clés

Corporate cash management; Corporate life cycle; Learning; Singular control;

Codes JEL

C02: Mathematical Methods
C11: Bayesian Analysis: General
C61: Optimization Techniques • Programming Models • Dynamic Analysis
G32: Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill
G33: Bankruptcy • Liquidation
G35: Payout Policy