Optimal Financing Policy for a Firm With Uncertain Fund Requirements

The earliest successes in developing asset management theory focusing predominantly on short-term optimization of physical stock flow systems are due to Masse [13]; Arrow, Harris, and Marschak [1]; and Whitin [22]. This led to the development of burgeoning literature on what has come to be known as “inventory theory†followed by its application to cash management problems by Baumol [2]. In contrast to the conventional static analysis of Tobin [19] and Markowitz [12], Baumol's model incorporates what Hicks [11] referred to as “frictions†or the adjustment costs. More recently the pioneering works by Miller and Orr [14] Eppen and Fama [3], Weitzman [20], and Sethi [4] have sought to extend this basic model by incorporating different cash flow and operating cost assumptions.