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Optimal corporate strategy under uncertainty
Authors:Andrew H. Chen  Dashan Huang
Affiliation:1. Department of Finance, Edwin L. Cox School of Business , Southern Methodist University , Dallas , USA;2. Department of Finance, Olin School of Business , Washington University , St. Louis , USA
Abstract:Within a dynamic setting, optimal corporate strategy management for a multi-division corporation involves restructuring a portfolio of Strategic Business Units (SBUs) periodically so as to maximize the firm's market value. Real option theory has been applied to model and explain managerial flexibility for both project selection and operational decisions. In general, optimal corporate strategy has focused on strategic environments and characteristics of business units rather than on managerial flexibility. In this article, we develop a feasible discrete-time model for optimal corporate strategy that incorporates both endogenous and exogenous factors and is consistent with the value-based criterion for maximizing shareholders’ wealth.
Keywords:optimal corporate strategy  strategic business units  intertemporal capital asset pricing model (ICAPM)  real options theory  SBU's market-volatility risk  SBU's state-variable risk  risk-adjusted net present value (RANPV) rule
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