A Generalized User-Revenue Model of Financial Firms under Dynamic Uncertainty: Equity Capital, Risk Adjustment, and the Conjectural User-Revenue Model

A generalized user-revenue model is proposed in which the volatility risk of quasi short-run profits and equity capital effects reflecting the risk of bearing the costs of financial distress are taken into consideration. This is achieved by extending the conjectural user-revenue model proposed by Homma and Souma (2005). Specifically, uncertainties are added to endogenous holding-revenue and holding-cost rates, and the utility function of financial firms is formulated in terms of both quasi short-run profits and equity capital. The conjectural user-revenue price is extended as a generalized user-revenue price, and the extended generalized-Lerner index is proposed to incorporate these extensions.