The Strange Attractor of the Firm

Chapter
Part of the New Economic Windows book series (NEW)

Abstract

In this chapter, we assume that corporate arrangement between owners, debt holders and managers builds modern firm. The governance of their interests and conflicts determines the crucial financial rules of the firm especially in the contemporary context of persistent financial crisis, accounting scandals, frauds and wasted earnings by the executive team. The lack of trust in their relationship with stockholders or bondholders pushes ownership to impose a strong discipline of payout mechanism extracting the free cash flows (FCF) from the manager hands. Accumulation of FCF and postponing payments should also imply a strong extra-dividend as a punishment to executives when they don’t respect the discipline of payout policy. To identify the dynamical outcome of such financial governance, we define a 3D system of differential equations modeling a firm under the best standard of management principles and rules but embedding a payout mechanism. The computations reveal that state variables of this firm follow a wide spectrum of dynamics amongst them singular strange attractors. The main results show that chaotic oscillation is an intrinsic and endogenous characteristic of the modern firm, not derived from (exogenous) market failure. Paradoxically, automated disciplining payout policy injects dynamical risks in a deterministic model of firm without any stochastic leverage.

Keywords

Modern firm Financial governance Nonlinear system Payout policy  Managers Equityholders Debtholders 

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Copyright information

© Springer International Publishing Switzerland 2014

Authors and Affiliations

  1. 1.Department of Quantitative Methods & Economics, Management InstituteUniversity of TunisLe BardoTunisia

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