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The firm under uncertainty: real and financial decisions

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  • Udo Broll
  • Kit Wong

Abstract

This paper examines the interplay between the real and financial decisions of the competitive firm under output price uncertainty. The firm faces additional sources of uncertainty that are aggregated into a background risk. We show that the firm always chooses its optimal debt–equity ratio to minimize the weighted average cost of capital, irrespective of the risk attitude of the firm and the incidence of the underlying uncertainty. We further show that the firm’s optimal input mix depends on its optimal debt–equity ratio, thereby rendering the interdependence of the real and financial decisions of the firm. When the background risk is either additive or multiplicative, we provide reasonable restrictions on the firm’s preferences so as to ensure that the firm’s optimal output is adversely affected upon the introduction of the background risk. Copyright Springer-Verlag 2013

Suggested Citation

  • Udo Broll & Kit Wong, 2013. "The firm under uncertainty: real and financial decisions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 36(2), pages 125-136, November.
    • Handle: RePEc:spr:decfin:v:36:y:2013:i:2:p:125-136
    DOI: 10.1007/s10203-011-0126-y
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Udo Broll & Soumyatanu Mukherjee, 2018. "The attitude of multinationals towards risks," Discussion Papers 2018-02, University of Nottingham, GEP.
    2. Stefan Franz Schubert & Udo Broll, 2015. "Consumption, inflation risk and dynamic hedging," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(2), June.
    3. Heinzel, Christoph, 2023. "Comparing utility derivative premia under additive and multiplicative risks," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 23-40.
    4. Kit Wong, 2014. "Production and hedging in futures markets with multiple delivery specifications," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 413-421, October.
    5. Alghalith, Moawia, 2016. "A note on the theory of the firm under multiple uncertainties," European Journal of Operational Research, Elsevier, vol. 251(1), pages 341-343.
    6. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll & Mamata Parhi, 2021. "Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 752-773, May.
    7. Broll, Udo & Pelster, Matthias & Kit, Pong Wong, 2021. "Export under risk and expectation dependence," CEPIE Working Papers 02/21, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    8. Caleb Cox & Arzé Karam & Matthias Pelster, 2022. "Two-Period Duopolies with Forward Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 29-62, February.

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    More about this item

    Keywords

    Background risk; Capital structure; Price uncertainty; D21; D81; G32;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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