Title: Ordering Decisions, Cost of Capital, and the Value of the Firm
Abstract: Since a holistic view of a firm can have a great impact on improving decisions, efforts to link the operations and finance decisions have been steadily growing in the literature. In that context, we present a model of a firm where the cost of capital for shareholders is affected by operational decisions. We provide an explicit expression for linking the cost of capital and an archetypical operational decision, namely, the ordering quantities, study the mechanisms through which this interaction takes place, and relate them to the firm's operating and financial risks. Using the Capital Asset Pricing Model, we find that, if risk comes only from additive financial exogenous shocks, investor's risk decreases with order quantity. Furthermore, we find that risk-averse investors should behave as risk-neutral agents to maximize the value of their investments, as far as the order quantity is concerned. Our results call into question the usual approaches to assessing risk in inventory models.
Publication Year: 2009
Publication Date: 2009-01-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
Cited By Count: 2
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