Optimal Firm's Dividend and Capital Structure For Mean Reverting Profitability

We model a risk-averse firm owner who wants to maximize the intertemporal expected utility of firm’s dividends. The optimal dynamic control problem is characterized by two stochastic state variables: equity value, and profitability (ROA) _rm. According empirical evi-dence, we let follow mean reverting process. solved in quasi-explicit form computing both dividend debt. Finally, calibrate actual US data check properties solution its sensitivity parameters. In particular, our results show that smooth over time leverage predominantly constant time. Neither asymmetric information nor frictions are necessary obtain these findings.