Expectations, adjustment costs and the optimal investment of a value-maximizing firm by Luis Alvarez

Cover of: Expectations, adjustment costs and the optimal investment of a value-maximizing firm | Luis Alvarez

Published by Dept. of Economics, University of Turku, Distribution, Turku University Library in Turku, Finland .

Written in English

Read online


  • Capital investments -- Mathematical models.,
  • Rational expectations (Economic theory) -- Mathematical models.

Edition Notes

Includes bibliographical references (p. 86-92).

Book details

Statementby Luis Alvarez.
SeriesTurun yliopiston julkaisuja. Sarja B, Humaniora,, osa 204 =, Annales Universitatis Turkuensis. Ser. B ;, tom. 204, Turun yliopiston julkaisuja., osa 204.
LC ClassificationsAS262.T84 A3 osa 204, HG4028.C4 A3 osa 204
The Physical Object
Pagination92 p. :
Number of Pages92
ID Numbers
Open LibraryOL842232M
ISBN 109512901048
LC Control Number95119637

Download Expectations, adjustment costs and the optimal investment of a value-maximizing firm

Model Formulation and Optimal Solution.- The Net Present Value and Further Economic Analysis.- Summary.- 3. The Net Present Value in Dynamic Adjustment Cost Models of the Firm.- Introduction.- The Theory of Adjustment Costs.- A Dynamic Model of the Firm with a Financial Structure and a Convex Adjustment Cost Function.

Within the field of the dynamics of the firm this book - develops a general investment decision rule. based on the concept "net present value of marginal investment". which is applicable in deterministic dynamic models of the firm; - studies the influence of adjustment costs of investment on optimal dynamic firm behavior; - extends the.

A dynamic optimal-control based model that explicitly includes the effects of adjustment costs of investment and financing is presented to analyse the investment and financing decisions of a. optimal investment decision in the case where the adjustment of capital stock involves adjustment costs for both purchasing and re-selling unit capital; in other words, capital is assumed to be.

To make the new invested assets fully productive, the firm has to incur in adjustment costs given by the convex function of the investment rate and capital stock: (2) C K s I s = b 2 I K − a s 2 p s K s where b is a positive (cost) parameter and a is the stationary investment rate for which adjustment costs are by: 6.

The Firm and Investment Opportunities A value-maximizing monopolist produces a commodity with downward-sloping iso-elastic demand, given by P t= X t Q γ−1, (1) where 0.

The higher the adjustment cost the firm faces, the less flexibility it has in adjusting capital, and the riskier its return will be. The endowment economy is in effect the limiting case of the production economy, when the adjustment cost is infinite and the channel of capital investment is completely shut down.

The Firm and Investment Opportunities A value-maximizing monopolist produces a commodity with downward-sloping iso-elastic demand given by P t= XtQ °¡1; () where 0. Expectations, adjustment costs and the optimal investment of a value-maximizing firm, Annales Universitatis Turkuensis, Series B, Google Scholar Auerbach and Hines, A.

The Firm and Investment Opportunities A value-maximizing monopolist produces a commodity with downward-sloping iso-elastic demand, given by Pt = XtQt-1, (1) where 0. A firm can raise up to $ million for investment from a mixture of debt, preferred stock and retained equity.

Above $ million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $ million will be ____ the marginal cost of capital for.

Get this from a library. Optimal Dynamic Investment Policies of a Value Maximizing Firm. [Peter M Kort] -- This book is a contribution to the area of dynamic models of the firm. In Chapter 1, a general investment decision rule based on the concept of net present value of marginal investment is.

It costs $20 per ton to transport the goods to Western. Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $ Actual per-ton direct labor is $ Other actual costs of storage and handling are $ The company president selects a $ transfer price.

This is an example of (CIA adapted). Assuming that there are no adjustment costs, no uncertainty and perfect competition exists, as Jorgenson does, the firm will always be adjusted to the optimal capital stock so that K=K.

Therefore, the question of adjustment to a discrete change in the interest rate does not rise. Abstract. Adjustment costs in general refer to the costs that economic agents incur when decision variables are changed.

They appear in agents’ optimization models to provide a basis for the derivation of the optimal rate of change, as distinct from the optimal level, of a decision variable and to establish a rationale for lags in the adjustment of choice variables to changes in exogenous.

neoclassical model with rational expectations in the spirit of Kydland and Prescott (). Intuitively, investment return from time t to t+1 equals the ratio of the marginal pro t of investment at t+1 divided by the marginal cost of investment at t.

This equation suggests two economic mechanisms that are potential driving forces of these. 1!!. Theories of Investment: A Theoretical Review with Empirical Applications!.

Johan!E!Eklund. Swedish!Entrepreneurship!Forum!and!Jönköping!International!Business!School. Turning to the empirical implications with respect to optimal capital investment, the positive effects of fixed operating costs for firms with relatively low adjustment costs, high cash-flow risk, and high fixed operating costs (cf.

Proposition 3) is a novel prediction that, to our knowledge, has not been tested in the literature. 15 Similarly.

If debt adjustment were optimal, i.e., if debt adjustment were to maximize the market value of equity, J (X, K, b), then the shareholders should have been compensated by the same amount, which would imply that J b (K, X, b) d b + K d b = 0 or J b (K, X, b) + K = 0 at the debt adjustment boundary.

A firm's optimal debt ratio is usually viewed as determined by a tradeoff of the costs and benefits of borrowing, holding the firm's assets and investment plans constant.

The firm is portrayed as balancing the value of interest tax shields against various costs of bankruptcy or financial embarassment. In a dynamic setting with expansion restricted to a fraction of firm size, the endogenously determined cost of capital uniformly exceeds the value maximizing return threshold for expansion.

Taking this into account, a manager accelerates investment to facilitate larger and more valuable future investments when earnings stochastically improve. The literature on optimal investment policy for a single firm has grown rapidly in recent years.¹ It is now widely agreed that a satisfactory microeconomic theory of capital should account not only for the determination of the firm’s “desired” capital stock, but also for the adjustment process by which this stock is attained (or approached).

We examine the role of adjustment costs in the firm-productivity effect from two angles: the financing and operating sides of a firm. We find that investment frictions accentuate the -productivity effect, but there is no empirical firm support for the role of operating rmore, we.

Tobin’s Q—the book-to-market ratio—explain the cross section of returns, and Whited and Wu’s 2 and unconstrained firm value–maximizing models.

Low-dividend firms simulated from the models to assume adjustment costs, and that investment depends on cash flow without the need to assume financial constraints.

Total investment expenditure, I, includes payments on J, as well as adjustment costs. Let Pj be the cost of a unit of physical capital, and iij (=Pj/P) its real price. Following Hayashi [], adjustment costs per unit of J are assumed to rise as a function of 37K, so that I = + q(J/K)J, where is the per—unit adjustment cost.

G, the firm must pay a fixed proportion, i, of G.8 Consistent with Carlson, Fisher, and Giammarino (), we define cost iG to encompass all costs associated with pursuing the growth opportunities (e.g., adjustment costs as well as the cost of new capital). Alvarez, L. Expectations, Adjustment Costs and the Optimal Investment of a Value Maximizing Firm.

Department of Economics, University of Turku. Turku, Finland. Bank, G and Tumlir, J. Economic Policy and the Adjustment Problem. London:Trade Policy Research Centre. Central Agency for Public Mobilization and Statistics.

Thus, the marginal adjustment cost model does not yield an "optimal capital" level but rather an optimal adjustment path. The q defined in the first equation is actually James Tobin's "q" (which, in this model, is defined as q = l /s where l is a costate variable representing the shadow value of capital).

This approach has potentially broad application within business economics, particularly in evaluating investment and hiring decisions; real options; and other aspects of uncertain iv, fixed costs, and Managerial:flexibility.

Economics () 49, doi: /be This dissertation consists of three essays focussing on various theoretical extensions and empirical implementations of a model characterizing the dynamic input demand behavior of the firm.

The analysis is based on recent developments on optimal investment decisions over time subject to increasing marginal costs of adjustment. Theoretical extensions to the model include the incorporation of (i. If this function is constant we may infer that the firm faces quadratic adjustment costs.

If the firm's propensity to adjust is positively related to the abso- lute size of zit, the hazard function is in- creasing and costs are nonconvex. At the aggregate level the responses of inputs to shocks are then nonlinear and depen- dent on history.

Firms incur adjust-ment costs when investing. The adjustment cost function, denoted Φ(Iit,Kit), is increasing and convex in Iit, decreasing in Kit, and of constant returns to scale in Iit and Kit. We use the standard quadratic functional form: Φ(Iit,Kit) = (a/2)(Iit/Kit)2Kit, in which a >.

In this setting, we show that the interplay of external financing costs and non-convex adjustment costs of investment generates a quantitatively large precautionary demand for cash hoarding because it makes difficult for firms to generate funds by either divesting real assets or raising external finance (see Bolton, Chen, and Wang (), and.

derive optimal investment behavior. In addition, we derive a closed-form expression for Tobin’s and relate it to optimal investment. The model we develop here also departs from standard models in the investment literature in several ways.

First, the model does not incorporate convex adjustment costs, so marginal is identically equal to one. The nature of adjustment costs Convex adjustment costs Eisner and Strotz [7] introduced the idea that partial adjustment may not be aresultoftherelativefixity of factors but rather that the firm experiences some cost of adjustment, which is increasing.

where and denote total investment and the current capital stock, and represents asset purchases or sales. In the model, all disinvestment occurs at the unit ore, any disinvestment would be reflected in a negative value for, and a non-negativity constraint affects new convex adjustment costs restrain small firms with large positive shocks from growing explosively.

Scarth (, pp. ) offered a multi-period model of the firm to concentrate on investment demand over time. We ignore Scarth’s adjustment cost for new capital, and extend capital to two defined types. Firms are subject to the constraint of the production function.

The Hou–Xue–Zhang q-factor model says that the expected return of an asset in excess of the risk-free rate is described by its sensitivities to the market factor, a size factor, an investment factor, and a return on equity (ROE) factor.

Empirically, the q-factor model shows strong explanatory power and largely summarizes the cross-section of average stock returns. Anne Rice, this book aims to include the effects of a progressive personal tax into the deterministic dynamic theory of the firm to this end the author investigates the impact of a progressive personal tax on the optimal dividend financing and investment policy of a shareholder controlled value maximising firm more specifically the.

dynamic firm and investor behaviour under progressive personal taxation lecture notes in economics and mathematical systems Posted By Roger Hargreaves Ltd TEXT ID f10bc Online PDF Ebook Epub Library stock price according to ftouhi ayed and zemzem the high stock price will make a higher firm value a dynamic theory of the firm production finance and investment.

Search this site: Humanities. Architecture and Environmental Design; Art History.The adjustment cost function embeds purchase costs incurred when the firm buys capital or the price received when the firm sells capital, as well as nonnegative costs of physical adjustment which may include a fixed cost of investment that is independent of the level of investment .The firm's managers will steer clear of a potential bankruptcy by selecting the highest possible debt face value that will still guarantee liquidity next period.

Optimal Policy with Fixed Adjustment Costs Adjustment costs change the flavour of the analysis.

42840 views Saturday, November 7, 2020