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
Date Written: February 4, 2011
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
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