| In this dissertation, we formulate a model prescribing optimal policy for cash disbursements and seasoned equity offerings taking into account the principle-agent problem inherent in these decisions. Specifically, we suppose that stockholders have perfect information about the level of current free cash flows. In order to discipline managers, stockholders would like to have excess free cash flows disbursed either as cash dividends or through stock repurchases. Managers resist stockholders in this regard since they prefer to have excess free cash flows in order to pursue personal interests and reduce the probability that the company will experience financial distress in the future. However, as a consequence of withholding cash disbursements, managers incur disutility due to the possibility that their control of the firm could be threatened by the market for corporate control. Due to their inability to fully eliminate firm-specific risk managers are generally more risk averse than stockholders. Managers may issue seasoned equity in an attempt to prevent free cash flow from falling below a given level. However, stockholders do not like this practice since it transfers a portion of their ownership rights to new shareholders. We model this situation as a stochastic impulse control problem, and succeed in finding an analytical solution. This is the first research that applies the theory of stochastic impulse control to the determination of optimal policy for cash disbursement and seasoned equity offerings. |
