Optimal dividends and bankruptcy procedures: Analysis of the Ornstein-Uhlenbeck process (Q645698)

In this paper, the authors take into account the difference that may exist (according to the new US Bankruptcy Code) between the default time of a company and its liquidation. Namely, when default occurs, a company does not necessarily go bankrupt immediately, but is allowed to keep its business going for a certain amount of time during which it can be reorganised. Mathematically speaking, they assume that the surplus of the firm follows an Ornstein-Uhlenbeck process, as opposed to a Brownian motion or a CEV as previous works suggested. In this framework, they are able to determine the solution to the optimal dividend problem in closed-form, modulo some inverse Laplace transforms. They further determine the optimal dividend barrier, i.e. the threshold above which any additional surplus is paid to the shareholders as dividends, as well as the distribution of the bankruptcy time.