Math Meth Oper Res (2009) 69:27–58DOI 10.1007/s00186-008-0228-7ORIGINAL ARTICLE
Optimal payout policy in presence of downside risk
Luis H. R. Alvarez
Teppo A. Rakkolainen
Received: 21 December 2007 / Accepted: 6 May 2008 / Published online: 24 June 2008© Springer-Verlag 2008
We analyze the determination of a value maximizing dividend payoutpolicy for a broad class of cash reserve processes modeled as spectrally negative jump diffusions. We extend previous results based on continuous diffusion modelsand characterize the value of the optimal dividend distribution strategy explicitly. Wealso characterize explicitly the values as well as the optimal dividend thresholds fora class of associated optimal liquidation and sequential lump sum dividend controlproblems. Our results indicate that both the value as well as the marginal value of the optimal policies are increasing functions of policy ﬂexibility in the discontinuoussetting as well.
Singular stochastic control
Dividends are one way in which ﬁrms distribute their retained earnings. The
dividend payout policy
of a ﬁrm should specify the rules according to which dividends are paidout—most importantly, the size of a dividend payment and its timing. As far as theimpactofthedividendpolicyontheshareholdervalueisconsidered,acrucialquestionis the presence or absence of transaction costs and other similar market imperfections.
L. H. R. Alvarez
T. A. Rakkolainen (
)Department of Economics, Turku School of Economics, 20500 Turku, Finlande-mail: teppo.rakkolainen@tse.ﬁL. H. R. Alvareze-mail: luis.alvarez@tse.ﬁ