On the optimality of funding and hiring/firing according to stochastic demand: The role of growth and shutdown options

N. Letifi and Jean-Luc Prigent

Economic Modelling, 2014, vol. 40, issue C, 410-422

Abstract: We examine the firm's investment and hiring/firing policy under stochastic demand with potential reversibility. We evaluate in particular the values of both investment and hiring/firing growth and shutdown options not only for the standard Cobb–Douglas production function but also when taking account of the natural upper bound on the output due to the demand level. For this latter purpose, we use results about average of options provided in Shackleton and Wojakowski (2007). As a by-product, we extend the approach of Tserlukevich (2008) by introducing the employment level to analyze in particular the optimality of the financial structure and leverage. Our approach allows us to get a quasi-explicit solution of the optimal firm's value that can be deeply analyzed. Such results can potentially explain the interest for flexible contractual arrangements with capital and labor firm's structure.

Keywords: Stochastic demand; Financial leverage; Employment level; Average of options; Growth and shutdown options (search for similar items in EconPapers)
JEL-codes: J22 J23 J64 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:40:y:2014:i:c:p:410-422

DOI: 10.1016/j.econmod.2013.11.022

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