Optimal corporate strategy under uncertainty |
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Authors: | Andrew H. Chen Dashan Huang |
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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 |
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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. |
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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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