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Optimal Capital Allocation Confronting Bankruptcy and Agency Costs
Company: Bank- en Financiewezen
Company Url: Click here to open
Year Of Publication: 2006
Month Of Publication: March
Download Count: 284
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 3-22-2007
Publisher: Administrator
Summary
The value of a firm that cannot modify continuously its hedging strategy is supposed to depend on the level of risk capital. Specifically, the cost of bankruptcy is characterised as the expectation with respect to a distorted probability distribution, in this way assessing the type of investors. The optimal capital is allocated to the lines of business of a conglomerate according to the borne risk and the type of divisional managers. Full-allocation is assured and no covariance is required. Further, a mechanism is provided, which allows for the distribution of equity in a decentralised structure. Since no conditions are imposed on the distribution functions describing risks, the raising and allocation principles are suitable both to financial and insurance applications.
Author(s)
Mierzejewski, Fernando Sign in to follow this author
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