Optimal Capital Investment Research Articles

Optimal capital investment structure and sustainable development: Evidence from China

This paper studies how capital structure (physical, human, environmental, and social capital) affects sustainable development. This paper constructs a model for optimal sustainable development and deduces the necessary condition is that the input ratio of per capita human capital, environmental capital, and social capital are equal to their respective output elasticity ratios. Using data from China (2007–2020), empirical tests confirm smaller deviations between output elasticity ratios and the actual input ratio are associated with higher sustainable development. This paper concludes that, unlike physical capital, investment in human, environmental, and social capital promote sustainable development.

Optimal capital structure and credit policy with bank-tax-guarantee

We study the optimal capital structure, credit policy and investment strategy of a small- and micro-sized enterprise that funds the expansion investment by bank-tax-guarantee, an innovative financing pattern that utilizes the superimposed effects of bank tax cooperation and bank guarantee cooperation. We show that investment is accelerated by stricter tax supervision, and is first delayed and then accelerated as the degree of tax payment increases. The optimal leverage ratio decreases with the cost of tax evasion and the degree of tax payment. The loose credit policy reduces corporate debt scale, guarantee cost and optimal leverage ratio.

OCI-CBR: A hybrid model for decision support in preference-aware investment scenarios

This article proposes an adaptable hybrid model for recommending effective investments in different scenarios. Currently, a wide variety of methodologies are used for company valuation, especially those that take into account financial statements. However, for private held companies, there is no method that would be capable of predicting, with full certainty, the future success of an investment. The Optimal Capital Investment Case-Base Reasoning (OCI-CBR) consists of a case-based reasoning system that uses a classification algorithm to prune the case base according to a projected increase in certain company attributes. Once the cases have been pruned and the case is fed with the most profitable investment opportunities, the case-based reasoning system recommends optimal investments to potential investors. The complete model is conceived as an intelligent hybrid model that optimizes the case base by employing different algorithms for data retrieval and reuse. The system makes recommendations based on the investor’s preferences and the investment decisions of other investors with similar profiles or interests.

Biodiesel Economic Evaluation and Biomass Planting Allocation Optimization in Global Supply Chain

During the past decade, the demand for biofuel has rapidly increased because of fossil fuel scarcity and pollution, which has resulted in the accelerating commercialization of the global biofuel markets with a potential 500 exajoules per year by 2050. This paper evaluates the economic benefits of five biomass types and proposes a stochastic programming model for the optimal design of the global biodiesel supply chain under the demand and price uncertainty. The biomass is produced in Southeast Asia and oil is extracted. Then, the vegetable oil is shipped to Europe and North America for biodiesel conversion and fulfilling the local demand. The results show that palm tree is a cost-effective clean energy with high benefits and low-carbon emissions. Based on the economic evaluation of biomass, the optimal capital investment, allocation of cultivated area, and transportation paths are identified to maximize the expected global profit in this supply chain in 2008–2012 by the proposed supply chain optimization model.

National development level effects on capital budgeting practices: a comparative study of nature vs nurture

Purpose This research should help determine whether development should focus on individual firms or will raising the national development level act like a rising tide and raise the performance of all corporations. Design/methodology/approach The comparative data used in this study come from 150 Australian (ASX200 index listed) firms and 150 Sri Lankan (Colombo Stock Exchange listed) firms. The research questions are answered via a quantitative research design that uses primary and secondary data. Findings The findings demonstrate that capital budgeting practices are more influenced by contingency features and sophistication in Australia and Sri Lanka. Also, Australian firms tend to use capital budget models with good-to-strong predictive power (except for ROE) and Sri Lankan firms tend to use capital-budget models with fair-to-poor predictive power. Further, the analysis of Australian firms yielded much stronger and more statistically significant results than the analysis of Sri Lankan firms. Practical implications In complex real-world situations, reconciling the outputs of a multifaceted approach to capital budgeting methods is more likely to give the depth and width of input needed to achieve an optimal capital investment plan. Originality/value The results of this study can provide rich information for stakeholders about new findings in capital budgeting (CB) practices and their contributions to firm performance in a comparative perspective.

Principles of Natural Resource Economics for Bitcoin

To assess claims such as Bitcoin is ‘digital gold’ it makes sense to examine whether Bitcoin exhibits features common to other exhaustible natural resources that are the concern of natural resource economists. We therefore present some foundational ideas in the economics of exhaustible resources and examine their relevance to Bitcoin. There are several useful similarities but also some key differences, chiefly with respect to how miners manage inventories, or their ‘inventory policy’. Therefore, to highlight this aspect, we use a simple model for any physical natural resource and introduce sensitivity to a capital-to-energy ratio. The resulting policy for Bitcoin miner over a halving cycle is not unlike a traditional miner in that optimal inventories are determined by optimal capital investments over the entire duration of the cycle.

Optimal investment under ambiguous technology shocks

This paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of Klibanoff et al. (2005). Although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment, this is not necessarily true because the shape of the production function plays a key role in determining the effect. Under some conditions, we show that the optimal amount of capital investment increases (decreases) in ambiguity aversion if the production function is substitute (complement), and that this result is counterintuitive when the production function is substitute. Furthermore, our main results hold if we assume the α-maxmin preferences in Ghirardato et al. (2004).

Discrete optimal capital investment and financing policies in fishery resource harvesting with reserve area

This research discusses a problem in renewable resource (fish) harvesting on single-owner fishery where the dynamics of growth are expressed by system of difference equations. The model involves three state variables (stock of equity, resource stock in reserve zone and unreserved zone) and two control variables (effort rate and dividend payout rate). Discrete Pontryagin maximum principle was applied to obtain optimality conditions which must be satisfied by the variables. Further, the forward-backward sweep method was used to determine the numerical solution of optimal control model. Three scenarios of interest rate applied to find out the response of company in managing harvesting effort and dividend payout rate were investigated.

The dynamism of pre-decision controls in the appraisal of strategic investments

In this study we examine the dynamism of pre-decision controls in the appraisal of strategic investments, an area largely overlooked by the literature, even though it is of the utmost importance to understand the mechanisms companies use to ensure their optimal capital investments. More specifically, we investigate how changes in companies’ economic, strategic, and organisational conditions relate to an increased emphasis on pre-decision controls such as policies, procedures, and routines. The empirical data is based on 108 interviews from among the 150 largest Finnish manufacturing companies. The paper contributes to the scarce capital budgeting literature by extending the discussion of the adaptations of pre-decision controls to external and internal environmental changes. We add to the literature by showing that changes in management may play a decisive role in control adaptations. Furthermore, we provide strong support to maintain that increased financial pressure can be related to the tightened use of controls.

Economic capital investment for quality improvement

In this paper, the author considers the quality improvement by capital investment for reducing the bias and variability of product. Assume that the quality characteristic is normally distributed with known mean and standard deviation. One can adopt the predictive method, i.e., capital investment, for improving the process parameters. The product is sold to the primary market when its quality characteristic meets the lower specification limit. The product is replaced and sold to the second market when its quality characteristic is below the lower specification limit. The optimal capital investment is determined based on the maximization of the expected total profit per unit.

Optimal Capital Structure and Investment with Real Options and Endogenous Debt Costs

We examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs. Higher capacity, ceteris paribus, increases operating leverage and default probability, but lowers ex post adjustment costs and generates larger tax shields. A key insight is that financial leverage and capacity are substitutes in the debt market equilibrium. We develop novel predictions about the effects of capital adjustment costs, operating costs, and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment. Received March 17, 2016; editorial decision July 8, 2017 by Editor Itay Goldstein.

Optimal capital structure and investment decisions under time-inconsistent preferences

Based on a continuous-time model of quasi-hyperbolic discounting, this paper provides an analytically tractable framework of entrepreneurial firms׳ capital structure and investment decisions under time-inconsistent preferences. Inefficiency in both investment and default is caused due to time inconsistency, if we view the time-consistent benchmark as efficient. Compared to the standard trade-off theory in corporate finance, we clarify that debt financing under time-inconsistent preferences brings a new trade-off between the alleviation effect on investment inefficiency and the aggravation effect on default inefficiency. The impact of time-inconsistent preferences depends on the entrepreneurs׳ belief regarding their future time-inconsistent behavior (i.e., sophisticated or naive). Concretely, we find that naive entrepreneurs always choose higher leverages, while sophisticated ones are more likely to choose lower leverages, compared to the time-consistent benchmark. Therefore, time inconsistency can explain the observed leverage puzzle (i.e., why firms choose different leverages even with similar fundamentals). Moreover, we demonstrate that time-inconsistent preferences delay investment and hasten default, due to the interaction among the three effects: option value effect, payoff value effect, and leverage effect. In particular, naive entrepreneurs invest later and default earlier than sophisticated ones, leading to a shorter operating period. These results support the empirical findings in entrepreneurial finance.

Complements and Substitutes between Innate Endowments and Human Capital Investment

This paper disputes the claim that efficiency requires complementarity between innate endowments and human capital investment. This entails that parents invest more in highly endowed children. In an elementary supply-demand model, both substitutes as well as complements can arise. Substitution is consistent with human capital investment in less innately-endowed progeny without invoking Rawlsian rules of allocation. The model is driven by the basic assumption that all parents want their children to achieve the highest status possible. We derive optimal human capital investments in an ideal environment, one that contains no obstruction to the expression of merit. Also, we begin to show how heterogeneous innate endowments affect the marginal cost conditions that yield substitution.

Formation and Economic Study on Hydrate Technology with NGH Pellets

This study presents economic and formation investigations on hydration effects by looking at natural gas hydrate (NGH) storage and transportation processes and formation conditions. The investigation includes experiments with methane. The obtained results show that the methane formation time increased linearly as the subcooling temperature decreased. Furthermore, the economic result indicates that the energy consumption parameter is appropriate for examining resource consumption for a system that, in turn, results in optimal capital investment through the storage and transportation process of NGH. The results also show that energy consumption increases logarithmically as the hydrate formation pressure increases. Finally, the study shows that the initial cost of the NGH transport chain is lower than the initial liquefied natural gas (LNG) transport cost.

Optimal Capital Structure, Relation-Specific Investment, and Supplier Competition

This paper studies the relationship between firm leverage and supplier market structure by examining their joint impacts on bargaining and relation-specific investments. We find that firm leverage decreases with the degree of competition among suppliers. Specifically, leverage decreases with the elasticity of substitution between suppliers. Leverage also decreases with the number of suppliers when the elasticity of substitution is high, and increases with the number of suppliers when the elasticity is low. Empirical evidence supports these model predictions. We find that firm leverage is positively related to the number of supplying industries, and negatively related to the average number of suppliers per supplying industry. Moreover, we find that firm leverage is positively related to the degree of input goods heterogeneity.

Investing in setup reduction in the EOQ Model with random yields under a Limited Capital Budget

In this paper, we attempt to determine the optimal capital investment in setup cost and optimal lot sizing policies to reduce yield variability for an economic order quantity model with random yields. We assume that the setup cost is the function of capital expenditure. We develop a solution procedure to determine the optimal lot size and the capital investment with a limited capital budget to minimize the expected total annual cost. Finally, a numerical example is presented to illustrate the procedure and to delineate the relationships between the optimal lot size and these investment decisions. These results evidently show that the performance on costs savings can be improved significantly through capital investment. Managerial implications are also included.

Optimal capital structure and investment options in finite horizon

A binomial lattice based framework for the analysis of finite investment options with finite operational phase is developed. Numerical results show that optimal leverage ratios are not affected by option moneyness at the investment trigger and leverage ratios are lower when the operational phase is longer. In the case of bonds, where principal payment is due, it is shown that long term debt maturity is optimal and leverage ratios are higher for longer debt horizons. These results are reversed in the case of bank loans with no principal payments. Investment and default triggers in finite horizon and leverage levels along the investment trigger are also investigated.

Optimal Capital Structure, Relation-Specific Investment, and Supplier Competition

Optimal Capital Structure, Relation-Specific Investment, and Supplier Competition

Optimal Capital Structure, Debt Structure, and Investment

We examine the optimal capital structure and priority structure of multiple classes of debt using a dynamic model where firms face a tradeoff between bankruptcy costs, interest tax shield benefits, and investment benefits. As a base case, we first analyze jointly optimal policies for a firm initially constrained to a single class of debt, which results in underinvestment in the growth option. Surprisingly, this standard case produces several novel predictions, such as, financial leverage ratios need not be inversely related to a firm's investment opportunities, and reliance on credit spreads to gauge agency costs of debt is inappropriate when it is hard to identify whether debt policy is endogenous or not. Relaxing the firm's constraint, we then study jointly optimal policies for initial debt and additional debt used to finance the growth option. Ironically, equityholders' optimal strategy in this unconstrained case results in overinvestment in the growth option. As a result, we obtain an interior optimum for priority structure as an important financial contracting device. One of the paper's key implications is that priority structure plays a critical and heretofore unrecognized role in helping to resolve bondholder-shareholder conflicts over investment policy. This financial contracting perspective offers other potentially fruitful insights to better understand the effects of optimal capital structure and debt structure on corporate investment policy.

A continuous review inventory model with controllable backorder rate and investments

In this study, we investigate a continuous review inventory model to reduce lead time, yield variability and setup cost simultaneously through capital investments. We assume that the backorder rate is depending on the length of the lead time through the amount of shortages. We also assume that lead time demand's distribution is not known but its first and second moments are known. We apply minimax distribution free procedure to minimise the expected total annual cost. By using logarithmic investment function we describe the relationship between the reduction in lead time, yield variability and setup cost with capital investment. This function was used in many existing models. Our main aim is to determine the optimal capital investment and ordering policies that minimises the expected total annual cost. To find out the optimal solution, an algorithm is given. With the help of this algorithm, optimal capital investment and ordering policies are wrought out. Numerical examples are given to elucidate the model. Our proposed model greatly differs from the model existing in the literature (the model by Lin and Hou (2005)) viz: (1) In the above model, yield variability and setup cost were reduced through capital investment. In our model we reduce yield variability setup cost and also the lead time, which plays a vital role in any business. By reducing lead time we can improve the service level to the customer so as to increase the competitive edge in business. (2) In the model (the model by Lin and Hou (2005)), it was assumed that lead time demand follows normal distribution. But in our model we take the distribution of lead time demand as distribution free. That is, it can follow any distribution which is more general. (3) In the above model (the model by Lin and Hou (2005)), shortages are completely backlogged. But we consider partial backlogging and take the backlogging rate as 0 ≤ B ≤ 1. If we set backlogging rate B = 1 we get the above model. That is, the above model is particular case of our model. (4) We also assume that the backorder rate depends on the length of the lead time through the amount of shortages. If the lead time is longer then shortage accumulation is higher. The patience of customers will result in failure in business since some customers may turn to some other supplier. Hence, the backorder rate will be reduced. This assumption is very realistic.