Dynamic firm behavior within an uncertain environment

The paper studies the impact of an uncertain environment on the optimal dynamic investment policies of a value maximizing firm. It presents a model in which risk-averse behavior of the shareholders is incorporated. The paper derives the policies that can be optimal for the firm and presents solutions under different scenarios. After incorporating a dynamic version of the Capital Asset Pricing Model, a new formula can be derived for the shareholders’ time preference rate, which consists of the riskless interest rate and a risk premium.