Optimal Dividend Distribution Research Articles

A synthesized distribution model: Asymmetric information, agency problem, and intertemporal optimization

A firm’s policy of distribution over current and future time periods influences the capital structure of the firm and its profitability. Managers decide on the amount of effort input in such a context of financial structure to maximize their utility. Nevertheless, shareholders’ preferred distribution of income is determined by the goal of corporate value maximization. The study aims to reach an optimal level of income distribution and reinvestment over current and future periods in which both the manager’s utility and shareholders’ corporate value have been maximized. The study adopts Lagrange’s multipliers method and the discounted cash flow valuation model of corporate value maximization. By processing a method of mathematical deduction and optimization, the study aims to reach an optimal equilibrium level of the dividend distribution model and explore key factors in the model for the determination of the distribution of income. As a result, the study concluded an optimal dividend distribution model, in which six factors jointly determine a theoretical equilibrium of optimization. These factors consist of the capital structure of the firm, the tax shield from debt financing, the growth rate of the dividend, dividend tax, the investment strategy of the principal, and the cost of capital.

Optimal Dividends Paid in a Foreign Currency for a Lévy Insurance Risk Model

This article considers an optimal dividend distribution problem for an insurance company where the dividends are paid in a foreign currency. In the absence of dividend payments, our risk process follows a spectrally negative Lévy process. We assume that the exchange rate is described by a an exponentially Lévy process, possibly containing the same risk sources like the surplus of the insurance company under consideration. The control mechanism chooses the amount of dividend payments. The objective is to maximize the expected dividend payments received until the time of ruin and a penalty payment at the time of ruin, which is an increasing function of the size of the shortfall at ruin. A complete solution is presented to the corresponding stochastic control problem. Via the corresponding Hamilton–Jacobi–Bellman equation we find the necessary and sufficient conditions for optimality of a single dividend barrier strategy. A number of numerical examples illustrate the theoretical analysis.

Optimal dividend policy when risk reserves follow a jump–diffusion process with a completely monotone jump density under Markov-regime switching

The paper studies optimal dividend distribution for an insurance company whose risk reserves in the absence of dividends follow a Markov-modulated jump–diffusion process with a completely monotone jump density where jump densities and parameters including discount rate are modulated by a finite-state irreducible Markov chain. The major goal is to maximize the expected cumulative discounted dividend payments until ruin time when risk reserve is less than or equal to zero for the first time. I extend the results of Jiang (2015) for a Markov-modulated jump–diffusion process from exponential jump densities to completely monotone jump densities by proving that it is also optimal to take a modulated barrier strategy at some positive regime-dependent levels and that value function as the fixed point of a contraction is explicitly characterized.

Optimal risk and dividend strategies with transaction costs and terminal value

This paper assumes that an insurance company can control the surplus by paying dividends, raising money and buying proportional reinsurance dynamically. The reinsurance premium is assumed to be calculated via the variance premium principle. Under the objective of maximizing the insurance company's value, we identify the optimal joint strategies and consider the effects of transaction costs and arbitrary terminal value at bankruptcy. From the results, we see that refinancing should be considered if and only if the terminal value and the transaction costs are not too high and the company is on the brink of bankruptcy, and the amount of each capital injection remains constant; the optimal ceded proportion of risk decreases with the current surplus and remains constant when the surplus exceeds some constant level; the optimal dividend distribution policy is of barrier type when the dividend rate is unrestricted or is of threshold type when the dividend rate is bounded, respectively. In particular, the insurance company should declare bankruptcy as soon as possible if the terminal value is high enough.

On Gerber–Shiu functions and optimal dividend distribution for a Lévy risk process in the presence of a penalty function

This paper concerns an optimal dividend distribution problem for an insurance company whose risk process evolves as a spectrally negative Lévy process (in the absence of dividend payments). The management of the company is assumed to control timing and size of dividend payments. The objective is to maximize the sum of the expected cumulative discounted dividend payments received until the moment of ruin and a penalty payment at the moment of ruin, which is an increasing function of the size of the shortfall at ruin; in addition, there may be a fixed cost for taking out dividends. A complete solution is presented to the corresponding stochastic control problem. It is established that the value-function is the unique stochastic solution and the pointwise smallest stochastic supersolution of the associated HJB equation. Furthermore, a necessary and sufficient condition is identified for optimality of a single dividend-band strategy, in terms of a particular Gerber–Shiu function. A number of concrete examples are analyzed.

On the Optimal Dividend Problem for Insurance Risk Models with Surplus-Dependent Premiums

This paper concerns an optimal dividend distribution problem for an insurance company with surplus-dependent premium. In the absence of dividend payments, such a risk process is a particular case of so-called piecewise deterministic Markov processes. The control mechanism chooses the size of dividend payments. The objective consists in maximizing the sum of the expected cumulative discounted dividend payments received until the time of ruin and a penalty payment at the time of ruin, which is an increasing function of the size of the shortfall at ruin. A complete solution is presented to the corresponding stochastic control problem. We identify the associated Hamilton–Jacobi–Bellman equation and find necessary and sufficient conditions for optimality of a single dividend-band strategy, in terms of particular Gerber–Shiu functions. A number of concrete examples are analyzed.

Dividend optimization for regime-switching general diffusions

We consider the optimal dividend distribution problem of a financial corporation whose surplus is modeled by a general diffusion process with both the drift and diffusion coefficients depending on the external economic regime as well as the surplus itself through general functions. The aim is to find a dividend payout scheme that maximizes the present value of the total dividends until ruin. We show that, depending on the configuration of the model parameters, there are two exclusive scenarios: (i)the optimal strategy uniquely exists and corresponds to paying out all surpluses in excess of a critical level (barrier) dependent on the economic regime and paying nothing when the surplus is below the critical level;(ii)there are no optimal strategies.

Dividend Optimization for Regime Switching General Diffusions

We consider the optimal dividend distribution problem of a financial corporation whose surplus is modeled by a general diffusion process with both the drift and the diffusion coefficients depending on the external economic regime as well as the surplus itself through general functions. The aim is to find a dividend payout scheme that maximizes the present value of the total dividends until ruin. We show that, depending on the configuration of the model parameters, there are two exclusive scenarios: (i) the optimal strategy uniquely exists and corresponds to paying out all surplus in excess of a critical level (barrier) dependent on the economic regime and paying nothing when the surplus is below the critical level; and (ii) there are no optimal strategies.

Optimal dividend distribution under Markov regime switching

We investigate the problem of optimal dividend distribution for a company in the presence of regime shifts. We consider a company whose cumulative net revenues evolve as a Brownian motion with positive drift that is modulated by a finite state Markov chain, and model the discount rate as a deterministic function of the current state of the chain. In this setting, the objective of the company is to maximize the expected cumulative discounted dividend payments until the moment of bankruptcy, which is taken to be the first time that the cash reserves (the cumulative net revenues minus cumulative dividend payments) are zero. We show that if the drift is positive in each state, it is optimal to adopt a barrier strategy at certain positive regime-dependent levels, and provide an explicit characterization of the value function as the fixed point of a contraction. In the case that the drift is small and negative in one state, the optimal strategy takes a different form, which we explicitly identify if there are two regimes. We also provide a numerical illustration of the sensitivities of the optimal barriers and the influence of regime switching.

Optimal reinsurance and dividend for a diffusion model with capital injection: Variance premium principle

This paper considers the optimal dividend problem with proportional reinsurance and capital injection for a large insurance portfolio. In particular, the reinsurance premium is assumed to be calculated via the variance principle instead of the expected value principle. Our objective is to maximize the expectation of the discounted dividend payments minus the discounted costs of capital injection. This optimization problem is studied in four cases depending on whether capital injection is allowed and whether there exist restrictions on dividend policies. In all cases, closed-form expressions for the value function and optimal dividend and reinsurance policies are obtained. From the results, we see that the optimal dividend distribution policy is of threshold type with a constant barrier, and that the optimal ceded proportion of risk exponentially decreases with the initial surplus and remains constant when the initial surplus exceeds the dividend barrier. Furthermore, we show that the optimization problem without capital injection is the limiting case of the one with capital injection when the proportional transaction cost goes to infinity.

Optimal dividend distribution policy from the perspective of the impatient and loss-averse investor

This paper discusses a problem concerning intertemporal decision-making under uncertainty when its subject has psychological biases. Here, we consider an investment company as a decision maker that invests money from investors in a financial asset and pays some dividend every period depending on the performance of the investment. On the other hand, we assume investors have such psychological biases as inconsistent time preference and loss aversion. Through numerical experiments we show that the optimal dividend distribution under inconsistent time preference and loss aversion is quite different from the distribution without these psychological factors, and that combinations of the two factors produce various patterns of dividend distribution.

Optimal payout policy in presence of downside risk

We analyze the determination of a value maximizing dividend payout policy for a broad class of cash reserve processes modeled as spectrally negative jump diffusions. We extend previous results based on continuous diffusion models and characterize the value of the optimal dividend distribution strategy explicitly. We also characterize explicitly the values as well as the optimal dividend thresholds for a class of associated optimal liquidation and sequential lump sum dividend control problems. Our results indicate that both the value as well as the marginal value of the optimal policies are increasing functions of policy flexibility in the discontinuous setting as well.

A Diffusion Model for Optimal Dividend Distribution for a Company with Constraints on Risk Control

This paper investigates a model of a corporation which faces constant liability payments and which can choose a production/business policy from an available set of control policies with different expected profits and risks. The objective is to find a business policy and a dividend distribution scheme so as to maximize the expected present value of the total dividend distributions. The main feature of this paper is that there are constraints on business activities such as inability to completely eliminate risk (even at the expense of reducing the potential profit to zero) or when such a risk cannot exceed a certain level. The case in which there is no restriction on the dividend pay-out rates is dealt with. This gives rise to a mixed regular-singular stochastic control problem. First the value function is analyzed in great detail and in particular is shown to be a viscosity solution of the corresponding Hamilton--Jacobi--Bellman (HJB) equation. Based on this it is further proved that the value function must be twice continuously differentiable. Then a delicate analysis is carried out on the HJB equation, leading to an explicit expression of the value function as well as the optimal policies.

Optimal Risk/Dividend Distribution Control Models: Applications to Insurance

The current paper presents a short survey of stochastic models of risk control and dividend optimization techniques for a financial corporation. While being close to consumption/investment models of Mathematical Finance, dividend optimization models possess special features which do not allow them to be treated as a particular case of consumption/investment models. In a typical model of this sort, in the absence of control, the reserve (surplus) process, which represents the liquid assets of the company, is governed by a Brownian motion with constant drift and diffusion coefficient. This is a limiting case of the classical Cramer-Lundberg model in which the reserve is a compound Poisson process, amended by a linear term, representing a constant influx of the insurance premiums. Risk control action corresponds to reinsuring part of the claims the cedent is required to pay simultaneously diverting part of the premiums to a reinsurance company. This translates into controlling the drift and the diffusion coefficient of the approximating process. The dividend distribution policy consists of choosing the times and the amounts of dividends to be paid put to shareholders. Mathematically, the cumulative dividend process is described by an increasing functional which may or may not be continuous with respect to time. The objective in the models presented here is maximization of the dividend pay-outs. We will discuss models with different types of conditions imposed upon a company and different types of reinsurances available, such as proportional, noncheap, proportional in a presence of a constant debt liability, excess-of-loss. We will show that in most cases the optimal dividend distribution scheme is of a barrier type, while the risk control policy depends substantially on the nature of reinsurance available.

Optimal risk and dividend distribution control models for an insurance company

The current paper presents a short survey of stochastic models of risk control and dividend optimization techniques for a financial corporation. While being close to consumption/investment models of Mathematical Finance, dividend optimization models possess special features which do not allow them to be treated as a particular case of consumption/investment models.¶ In a typical model of this sort, in the absence of control, the reserve (surplus) process, which represents the liquid assets of the company, is governed by a Brownian motion with constant drift and diffusion coefficient. This is a limiting case of the classical Cramer-Lundberg model in which the reserve is a compound Poisson process, amended by a linear term, representing a constant influx of the insurance premiums. Risk control action corresponds to reinsuring part of the claims the cedent is required to pay simultaneously diverting part of the premiums to a reinsurance company. This translates into controlling the drift and the diffusion coefficient of the approximating process. The dividend distribution policy consists of choosing the times and the amounts of dividends to be paid out to shareholders. Mathematically, the cumulative dividend process is described by an increasing functional which may or may not be continuous with respect to time.¶ The objective in the models presented here is maximization of the dividend pay-outs. We will discuss models with different types of conditions imposed upon a company and different types of reinsurances available, such as proportional, noncheap, proportional in a presence of a constant debt liability, excess-of-loss. We will show that in most cases the optimal dividend distribution scheme is of a barrier type, while the risk control policy depends significantly on the nature of the reinsurance available.