Premium
SHAREHOLDERS' UNANIMITY WITH INCOMPLETE MARKETS *
Author(s) -
CarcelesPoveda Eva,
CoenPirani Daniele
Publication year - 2009
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2009.00541.x
Subject(s) - shareholder , unanimity , incomplete markets , investment (military) , economics , monetary economics , microeconomics , production function , capital (architecture) , production (economics) , returns to scale , capital market , business , finance , corporate governance , archaeology , politics , political science , law , history
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.