Optimal Corporate Investment and Financing Policies: A Simple Quantitative Rule in a Novel General Setting

32 Pages Posted: 17 Nov 2010 Last revised: 8 Feb 2011

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

Université de Paris 1 Panthéon-Sorbonne; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: February 4, 2011

Abstract

We aim at obtaining a simple quantitative rule for the joint determining of optimal corporate investment and financing policies in an intertemporal setting. A novel general continuous-time framework, inspired by the optimal portfolio design literature, is first built. We derive the optimal assets-to-equity and debt-to-equity ratios. Novel principles - driven by speculation and hedging motives - for the corporate decision-making process are exposed. The rule is then simplified to offer an easily obtainable quantitative benchmark for the firm’s manager. We eventually show how the proposed behavior can be applied in practice.

Keywords: optimal corporate investment and financing policies, optimal portfolio, speculation, hedging, stochastic dynamic programming

JEL Classification: C61, D92, G11, G31, G32

Suggested Citation

Romaniuk, Katarzyna, Optimal Corporate Investment and Financing Policies: A Simple Quantitative Rule in a Novel General Setting (February 4, 2011). Available at SSRN: https://ssrn.com/abstract=1710151 or http://dx.doi.org/10.2139/ssrn.1710151

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005
France

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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