Abstract
We analyse the interaction between the dividend policy and the decision on investment in a growth opportunity of a liquidity constrained firm. This leads us to study a mixed singular control/optimal stopping problem for a diffusion that we solve quasi-explicitly by establishing a connection with an optimal stopping problem. We characterize situations where it is optimal to postpone the distribution of dividends in order to invest at a subsequent date in the growth opportunity. We show that uncertainty and liquidity shocks have an ambiguous effect on the investment decision.
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Décamps, JP., Villeneuve, S. Optimal dividend policy and growth option. Finance Stoch 11, 3–27 (2007). https://doi.org/10.1007/s00780-006-0027-z
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DOI: https://doi.org/10.1007/s00780-006-0027-z