Risk-taking, financial distress and innovation

Arnav Sheth, Larry Shepp, Oded Palmon

Research output: Chapter in Book/Report/Conference proceedingConference contribution


We use our numerical technique to explore the optimality of risk-taking under financial distress. In our model, cash reserves are represented by a Brownian processes that includes an innovation parameter. When this innovation parameter goes to zero, our results show that risk-taking is optimal only when distress costs are extremely high. Thus, non-innovators need a hefty penalty to optimally take risks under financial distress. As the level of innovation increases however, it becomes optimal for innovators to undertake risky investments under financial distress without hefty penalties. The implications of our analysis might partially explain the financial crisis of 2007-2009.

Original languageEnglish (US)
Title of host publicationProceedings of the World Congress on Engineering 2011, WCE 2011
PublisherNewswood Ltd.
Number of pages6
ISBN (Print)9789881821065
StatePublished - 2011
EventWorld Congress on Engineering 2011, WCE 2011 - London, United Kingdom
Duration: Jul 6 2011Jul 8 2011

Publication series

NameProceedings of the World Congress on Engineering 2011, WCE 2011


ConferenceWorld Congress on Engineering 2011, WCE 2011
Country/TerritoryUnited Kingdom

All Science Journal Classification (ASJC) codes

  • Applied Mathematics
  • Computer Science(all)
  • Engineering(all)


  • Brownian motion
  • Financial distress
  • Numerical methods
  • Risk
  • Stochastic control


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