Publication Type
Journal Article
Version
publishedVersion
Publication Date
12-2011
Abstract
This paper analyzes the impact of endogenous credit terms under capital market imperfections in a capacity investment setting. We model a monopolist firm that decides on its technology choice (flexible versus dedicated) and capacity level under demand uncertainty. Differing from the majority of the stochastic capacity investment literature, we assume that the firm is budget constrained and can relax its budget constraint by borrowing from a creditor. The creditor offers technology-specific loan contracts to the firm, after which the firm makes its technology choice and subsequent decisions. Capital market imperfections impose financing frictions on the firm. Our analysis contributes to the capacity investment literature by extending the theory of stochastic capacity investment and flexible versus dedicated technology choice to understand the impact of capital market imperfections, and by analyzing the impact of demand uncertainty (variability and correlation) on the operational decisions and the performance of the firm under different capital market conditions. We demonstrate that the endogenous nature of credit terms in imperfect capital markets may modify or reverse conclusions concerning capacity investment and technology choice obtained under the perfect market assumption and we explain why. The theory developed in this paper suggests some rules of thumb for the strategic management of the capacity and technology choice in imperfect capital markets.
Keywords
capacity, flexibility, financing, newsvendor, limited liability, market imperfection
Discipline
Finance and Financial Management | Operations and Supply Chain Management
Research Areas
Operations Management
Publication
Management Science
Volume
57
Issue
12
First Page
2163
Last Page
2179
ISSN
0025-1909
Identifier
10.1287/mnsc.1110.1395
Publisher
INFORMS
Citation
BOYABATLI, Onur and TOKTAY, L. Bertil.
Stochastic Capacity Investment and Flexible vs. Dedicated Technology Choice in Imperfect Capital Markets. (2011). Management Science. 57, (12), 2163-2179.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3789
Copyright Owner and License
Publisher
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Technical Appendix
Included in
Finance and Financial Management Commons, Operations and Supply Chain Management Commons
Comments
Permission granted by INFORMS to have published version on the SMU repository InK, 2014 March 3.