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Financial Planning Where the Firm's Demand for Funds is Nonstationary and Stochastic

Author

Listed:
  • John D. Martin

    (College of Business, University of Texas, Austin, Texas 78712)

  • George Emir Morgan

    (Department of Finance, Insurance and Business Law, Virginia Polytechnic Institute and State University, Blacksburg, Virginia 24061)

Abstract

The incentive for a firm to engage in planning (prearranging) for its future financing derives from the interaction of uncertainty concerning the amount and timing of future needs and the cost of negotiating and terminating contracts in capital markets. Three conditions on relative costs and probability distributions are identified under which no financial slack should be raised. If those conditions are not met, then under one set of reasonable assumptions the optimum amount of slack will be more than the largest possible future need. The model allows for surprises which can cause upward or downward (in contrast to EOQ models) revisions in the future regarding the optimal level of slack to continue to carry.

Suggested Citation

  • John D. Martin & George Emir Morgan, 1988. "Financial Planning Where the Firm's Demand for Funds is Nonstationary and Stochastic," Management Science, INFORMS, vol. 34(9), pages 1054-1066, September.
  • Handle: RePEc:inm:ormnsc:v:34:y:1988:i:9:p:1054-1066
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    File URL: http://dx.doi.org/10.1287/mnsc.34.9.1054
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    References listed on IDEAS

    as
    1. Leech, Dennis, 1985. "Ownership Concentration and the Theory of the Firm : A Simple-Game-Theoretic Approach to Applied US Corporations in the 1930's," The Warwick Economics Research Paper Series (TWERPS) 262, University of Warwick, Department of Economics.
    2. Guillermo Owen, 1972. "Multilinear Extensions of Games," Management Science, INFORMS, vol. 18(5-Part-2), pages 64-79, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011. "Corporate financial and investment policies when future financing is not frictionless," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 675-693, June.
    2. Hobdari, Bersant & Jones, Derek C. & Mygind, Niels, 2009. "Capital investment and determinants of financial constraints in Estonia," Economic Systems, Elsevier, vol. 33(4), pages 344-359, December.
    3. Christian Lohmann & Sandro Lombardo, 2014. "Resource allocation within a budgeting game: truthful reporting as the dominant strategy under collusion," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 25(1), pages 33-54, September.

    More about this item

    Keywords

    planning; financial slack; contracting costs;

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