In this article, we employ the concept of value-at-risk to model a kind of risk-averse behaviour of a firm which seeks to maximize profit a la Greenwald-Stiglitz [5]. It is shown that there exists a unique well-defined solution function, which relates output to the firm's net worth, but that this function is not monotone. The latter is due to the fact that whenever the VaR-constraint is not binding, the firm behaves in a risk-neutral fashion. It is also shown that in this context, the Modigliani-Miller theorem applies only in the special case where there is no risk of bankruptcy.
Tulli, V., Weinrich, G. (2009). A firm's optimizing behaviour under a value-at-risk constraint. OPTIMIZATION, 58(2), 213-226 [10.1080/02331930701761573].
A firm's optimizing behaviour under a value-at-risk constraint
TULLI, VANDA
;
2009
Abstract
In this article, we employ the concept of value-at-risk to model a kind of risk-averse behaviour of a firm which seeks to maximize profit a la Greenwald-Stiglitz [5]. It is shown that there exists a unique well-defined solution function, which relates output to the firm's net worth, but that this function is not monotone. The latter is due to the fact that whenever the VaR-constraint is not binding, the firm behaves in a risk-neutral fashion. It is also shown that in this context, the Modigliani-Miller theorem applies only in the special case where there is no risk of bankruptcy.
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