Corporate control and investment decisions under uncertainty with incomplete markets

Abstract

In a stock-market economy under certainty, or uncertainty but with a complete set of asset markets, the objective of the firm is profit maximization. In an economy under uncertainty with incomplete asset markets, profit maximization is not a well-defined objective. We present a general equilibrium model of firm's investment decision under uncertainty based on the preferences of major shareholders and their corporate control power over production outcomes and we compare it to some well-established investment decision criteria.

JEL Classification: D210, D810, D520, C710