Value Maximization under Stochastic Quasi-Hyperbolic Discounting

Abstract

We investigate a value-maximizing problem incorporating a human behavior pattern: present-biased-ness, for a firm which navigates strategic decisions encompassing earning retention/payout and capital injection policies, within the framework of Lévy processes. We employ the concept of stochastic quasi-hyperbolic discounting to capture the present-biased inclinations and model decision making as an intra-personal game with sophisticated decision-makers. Our analysis yields closed-form solutions, revealing that double-barrier strategies constitute Markov equilibrium strategies. Our findings reveal that firms, influenced by present-biased-ness, initiate dividend payments sooner, diminishing overall value compared to scenarios without present-biased-ness (under exponential discounting). We also discuss bailout optimality, providing necessary and sufficient conditions. The impact of behavioral issues is examined in the Brownian motion and jump diffusion cases.

42 pages, 14 figures