Managing capital market frictions via cost-reduction investments

Simple item page
buir.contributor.authorTanrısever, Fehmi
buir.contributor.orcidTanrısever, Fehmi|0000-0002-3921-3877
dc.citation.epage105en_US
dc.citation.issueNumber1en_US
dc.citation.spage88en_US
dc.citation.volumeNumber23en_US
dc.contributor.authorTanrısever, Fehmi
dc.contributor.authorJoglekar, N.
dc.contributor.authorErzurumlu, S.
dc.contributor.authorLévesque, M.
dc.date.accessioned2021-03-17T09:04:29Z
dc.date.available2021-03-17T09:04:29Z
dc.date.issued2021
dc.departmentDepartment of Managementen_US
dc.description.abstractProblem definition: We examine how the presence of capital market frictions influences the decision to invest in production cost reduction and the resultant production volume. This investment can increase the firm’s cash flow by increasing the profit margin, but it can also decrease the firm’s risk-free cash reserves and thus affect its exposure to capital market frictions. Academic/practical relevance: Process improvement aimed at production cost reduction has generated myriad of theoretical questions about efficient investment options and capacity choices. From a managerial perspective, process improvement is a fundamental concern in operations strategy. Nevertheless, its analysis typically excludes financial constraints by assuming a perfect capital market. Methodology: We formulate a two-stage profit maximization model in which a capital-constrained firm commits to a cost-reduction investment in the first stage in anticipation of its production decision in the second stage of this two-stage decision process. The firm considers capital market frictions when making decisions at each stage, while considering uncertainty in demand for its offering and in reducing its unit production cost. Results: When a firm faces small initial capital and low preinvestment unit production costs, it can benefit from investing in production cost reduction in the presence of capital market frictions more so than in their absence. Moreover, uncertainty in the production cost reduction mitigates the impact of market frictions on the net benefit (i.e., additional profit), whereas demand uncertainty decreases the feasible parameter space, where investing in production cost reduction is optimal. Managerial implications: A firm’s decision to invest in production cost reduction affects its operational and financial capabilities. Managers should thus consider this investment as an operational hedge not only against the uncertainty of matching supply and demand but also against exposure to capital market frictions and the resultant financial risk.en_US
dc.identifier.doi10.1287/msom.2019.0814en_US
dc.identifier.eissn1526-5498
dc.identifier.issn1523-4614
dc.identifier.urihttp://hdl.handle.net/11693/75945
dc.language.isoEnglishen_US
dc.publisherINFORMSen_US
dc.relation.isversionofhttps://doi.org/10.1287/msom.2019.0814en_US
dc.source.titleManufacturing & Service Operations Managementen_US
dc.subjectCost-reduction investmenten_US
dc.subjectOperational hedgingen_US
dc.subjectCapital market frictionsen_US
dc.subjectOM-finance interfaceen_US
dc.titleManaging capital market frictions via cost-reduction investmentsen_US
dc.typeArticleen_US

Files

Original bundle
Now showing 1 - 1 of 1
Thumbnail Image
Name:
Managing_Capital_Market_Frictions_via_Cost-Reduction_Investments.pdf
Size:
1.83 MB
Format:
Adobe Portable Document Format
Description:
Download
License bundle
Now showing 1 - 1 of 1
No Thumbnail Available
Name:
license.txt
Size:
1.71 KB
Format:
Item-specific license agreed upon to submission
Description:
Download

Collections

Department of Management