Shareholders Unanimity with Incomplete Markets
journal contributionposted on 01.11.2010 by Eva Carceles-Poveda, Daniele Coen-Pirani
Any type of content formally published in an academic journal, usually following a peer-review process.
When markets are incomplete, shareholders typically disagree on the firm's optimal investment plan. This article studies the shareholders' preferences with respect to the firm's investment in a model with aggregate risk, incomplete markets and heterogeneous households who trade in firms' shares instead of directly accumulating physical capital. If the production function exhibits constant returns to scale and borrowing limits are not binding, a firm's shareholders unanimously agree on its optimal level of investment. In contrast, with binding borrowing constraints, constrained shareholders prefer a higher level of investment than unconstrained ones.