FrançaisEnglish

Érudit | Dépôt de documents >
CIRPÉE - Centre interuniversitaire sur le risque, les politiques économiques et l'emploi >
Cahiers de recherche du CIRPÉE >

Please use this identifier to cite or link to this item:

https://depot.erudit.org/id/003517dd

Title: Firms, Shareholders, and Financial Markets
Authors: Mirman, Leonard J.
Santugini, Marc
Keywords: Financial sector
Firm behavior
Market power
Monopoly
Perfect competition
Publicly-traded firm
Shareholder behavior
Risk aversion
Risk taking
Issue Date: 2011-08
Series/Report no.: Cahiers du CIRPÉE;11-24
Abstract: We study the influence of the financial market on the decisions of firms in the real market. To that end, we present a model in which the shareholders portfolio selection of assets and the decisions of the publicly-traded firms are integrated through the market process. Financial access alters the objective function of the firms, and the market interaction of shareholders substantially influences firms behavior in the real sector. After characterizing the unique equilibrium, we show that the financial sector integrates the preferences of all shareholders into the decisions for production and ownership structure. The participation from investors in the financial market also limits the firms’ ability to manipulate real prices, i.e., there is a loss of market power in the real sector. Note that, while the loss of market power changes expected profits, it is not detrimental to shareholders since the expected return of equity share depends on the variance (and not the mean) of profits. Indeed, any change in expected profits is absorbed by the financial price. We also show that financial access increases production, thereby altering the distribution of profits. In particular, financial access induces firms to take on more risk. Finally, financial access makes the relationship between risk-aversion and risktaking ambiguous. For example, it is possible that an increase in risk-aversion leads to more risk-taking, i.e., the variance of real profits increases.
URI: https://depot.erudit.org/id/003517dd
Appears in Collections:Cahiers de recherche du CIRPÉE

Files in This Item:

CIRPEE11-24.pdf, (Adobe PDF ; 434.39 kB)

Items in the Repository are protected by copyright, with all rights reserved, unless otherwise indicated.

 

About Érudit | Subscriptions | RSS | Terms of Use | Contact us |

Consortium Érudit ©  2016