Macroeconomic conditions and a firm's investment decisions

Academic Press Inc Elsevier Science, 2014
Article

We propose a model of a firm's reversible investment decision with macroeconomic conditions based on optimal switching of a diffusion regime. The switching costs and the cash flow generated from the firm depend on a business cycle alternating via a Markov chain, and the triggers of investment and disinvestment in each state are determined endogenously. Provided the investment costs are cyclical due to high wages and rents in a boom, the investment tends to be delayed in boom, while the disinvestment is likely to be made earlier in terms of the level of switching triggers. This result shows us that the 'hysteresis' of investment is a rigorous phenomenon that does not change dramatically depending on business cycle. Yet, the business cycle may still amplify and propagate the exogenous shocks from macroeconomic conditions as far as the persistence of business cycle is concerned. In particular, the investment is deferred and the disinvestment occurs earlier when recession lasts longer and boom ends soon. (C) 2014 Elsevier Inc. All rights reserved.

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Academic Press Inc Elsevier Science, 2014
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Publications associées (11)

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The effects of business cycle and debt maturity on a firm's investment and default decisions

Michi Nishihara

We propose a model that jointly determines the capital structure and investment decisions taking business cycle and debt maturity into account. It endogenously determines the triggers of investment/disinvestment and default, which depend on the state of the economy. The investment triggers can be unimodal or bimodal with respect to debt maturity depending on the volatility of the growth opportunities. The optimal leverage ratio tends to increase as recession shortens, which induces higher yield spreads for short-term debt; but long-term debt is more affected by increase of expected cash flow, and thus the yield spreads decrease. (C) 2015 Elsevier Inc. All rights reserved.

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Erwan Morellec

The recent law and finance literature following Shleifer and Vishny (1997) and La Porta, Lopez-de Silanes, and Shleifer (1998) argues that the expropriation of minority shareholders by controlling shareholders is at the core of agency conflicts in most countries. While much empirical evidence has been accumulated regarding the importance and effects of this particular type of conflict, theoretical work in this area has largely been qualitative, focusing only on directional effects. This paper builds a contingent claims model in which a controlling shareholder can divert part of the firm's cash flows as private benefits at the expense of minority shareholders. In this environment, we examine the impact of the opportunistic behavior of the controlling shareholder on investment and financing decisions. The model shows that conflicts of interests among shareholders can explain the low debt levels observed in practice. It also examines the impact of agency conflicts on firms' investment decisions and the cross-sectional variation in capital structures.

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In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However, in most situations, corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm’s investment opportunities are not spanned by those of existing assets. The present paper examines the impact of managerial risk aversion on investment decisions when the manager is exposed to idiosyncratic risk and faces the risk of a control challenge. In the paper, the investment policy selected by the manager reflects a trade-off between his incentives to reduce risk and the need to ensure sufficient efficiency to prevent control challenges. The analysis demonstrates that risk aversion induces the manager to speed up investment, leading to a significant erosion of the value of the option to wait.

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Investissement

Selon le vocabulaire de la comptabilité nationale, l’investissement (mesuré par la formation brute de capital fixe, en abrégé FBCF), peut être le fait de différents agents économiques :

pour les e

Cycle économique

vignette|Cycle économique Un cycle économique est, en économie, une période d'une durée déterminée, correspondant plus ou moins exactement au retour d'un même phénomène de croissance et de récession.

Flux de trésorerie

En finance d'entreprise, les flux de trésorerie (en anglais, cash flow) sont tous les mouvements de liquidités entrants ou sortants, que connaît une entreprise au cours d'une période spécifique. Ils