Review of Economic Studies Vol. 50 No. 2 1983
Competitive Stock Markets
Abstract
In a perfectly competitive general equilibrium model with many periods, incomplete markets, and trading through time, we show: (a) current net market value maximization is unanimously favoured by shareholders as the objective of the firm (b) this corresponds to maximizing a relatively simple present discounted value formula (c) the formula is used to derive an Arrow-lind-type result on the absence of a risk premium in the discount factors for valuing investments whose risk is uncorrelated with social risk (d) competitive stock markets are constrained Pareto optimal in the sense of Diamond. Suppose that a perfectly competitive firm wishes to determine its intertemporal produc-tion-and-investment plan in accordance with its shareholders ' interests. Will it be able to satisfy this desideratum? And if so, what course should it pursue? In a general equilibrium model with many periods, uncertainty, incomplete markets, and trading through time, we show that 1. All initial shareholders of a perfectly competitive firm will wish that firm to choose a production-and-investment plan that maximizes its current net market value
- DOI
- 10.2307/2297418
- Volume
- 50
- Issue
- 2
- Pages
- 305
- Sources
- openalex crossref