as part of the Quantitative Finance Seminars, Dr. Andrea Modena (University of Mannheim) will give a seminar entitled "Coordinating Dividends and Capital Regulation" (joint work with Luca Regis and Salvatore Federico) on November 11th at 11 am in Aula Fermi at Scuola Normale Superiore in Pisa.The seminar can also be followed online by sending an email to giorgio.rizzini@sns.it.

Best regards,

Giorgio Rizzini

We develop a tractable dynamic corporate finance model to analyze the effects of state-contingent dividend restrictions and capital requirements on firm optimal policies and value. In the model, a risk-neutral shareholder manages a firm that generates stochastic income under time-varying macroeconomic conditions. The manager maximizes shareholder value by paying dividends, holding reserves, and issuing costly equity without agency conflicts. We analytically solve the firm's stochastic control problem and derive its reserve distribution in closed form. The model predicts that restricting dividends in "bad" macroeconomic states—characterized by lower and more volatile cash flows— reduces shareholder value but can effectively sustain the firm's credit capacity. The policy, however, curtails the firm's recapitalization incentives and credit capacity in "good" states. Coordinating dividends with counter-cyclical capital regulation can mitigate value losses but negatively impacts recapitalization incentives further.