Clement G. Krouse, Portfolio Balancing Corporate Assets and Liabilities with Special Application to Insurance Management, The Journal of Financial and Quantitative Analysis, Vol. 5, No. 1 (Mar., 1970), pp. 77-104

Conditions necessary and sufficient for shareholders to express unanimity with respect to firm decisions have been recently developed by Harry DeAngelo (1981). In a model economy where firms are properly relative to the market, Louis Makowski (1983) has subsequently found DeAngelo's requirement that existing securities span the opportunity set to be unnecessary for unanimity. At issue in this difference is what is meant by necessity in propositions relating to model economies: is Makowski's small relative to the market condition of interest, or is it, like the Giffen good, only a curiousity? While Makowski's case initially appears implausible, I shall here argue that the specification of an economy with markets is a reasonable instance of his analysis and qualifies as an interesting complement to the general propositions of DeAngelo.' In Section I some basic notation and the structure of the model economy are set out. Following that, the distinction between the unanimity proofs of DeAngelo and Makowski is drawn and the issue of reasonableness in necessary conditions is addressed. Conditions under which equivalently complete markets arise are then described, and the reasonableness of these are considered along with their implications for unanimity.

Considerable literature in the investment, growth, and financing of the corporation has developed in recent years. While theoretical studies in this area have contributed importantly to the understanding of the firm's time-optimal decision program, they have generally been limited in scope to the all-internally-funded firm and steady-state dynamics. The well-known analyses of Gordon ]7[ and Lintner ]13[ are typical of this restricted focus. Herein we relax these specializing conditions, both by permitting external equity as a financing alternative and by not a priori requiring the firm to make identical (earnings proportional) investment and financing decisions at every time instant such that it progresses only along a constant, exponentially growing earnings path.