Optimal dynamic investment policies of a value maximizing firm (Q1202046)

This book is a contribution to the ``dynamic models of the firm'' and shows how optimal control theory can be used to design and analyse the behaviour of the firm in a dynamic context. In this way the book provides a suitable theoretical framework for the description of the different stages in the development of the firm over time (such as growth, stationarity and contraction). It is divided in two main parts: Chapters 2 and 3 which contain deterministic models, and Chapter 4 where the analysis is extended by adding a stochastic component to the earnings function. For deterministic dynamic models of the firm a new investment decision rule based on the net present value of marginal investment is developed. This concept is defined as the difference between the discounted earnings stream over the planning period, due to one extra dollar of investment, and the initial outlay required for an investment of one dollar. This rule is then applied to four existing dynamic models of the firm. In Chapter 3, new dynamic models of the firm combining a financial structure and a convex adjustment cost function are presented. Here also, the net present value of marginal investment is used for analysing the optimal solution. Chapter 4 is devoted to stochastic dynamic models of the firm, extended by incorporating risk-averse behavior of the shareholders. The mathematical derivations of the optimal solutions and the proofs of the propositions are given in the Appendix. The conclusions of this book are summarized in Chapter 5.