Research On The Problem Of Corporate Investment And Financing Decisions Under Mean-Reverting Model

Energy issue is one of the major issues in the world, it is related to the development of countries around the world. Facing the current energy crisis, countries have regarded the way to solve the energy problem on a strategic level. Non-ferrous metals play a more and more important role in the progress of human development. They are essential strategic materials in the production activities. However, whether energy or non-ferrous metals industry, both have to face the risk of the volatility of price.How to make the right investment and financing decisions according to the price move-ments has become the key in risk management for the government and enterprise. Investment and financing decision is the problem that corporate must face in the process of development, it is the basis of growth of the future cash flows related to the company's overall value. In the system of separation of ownership in modern enterprise, the principal-agent relationship will necessarily have an impact on optimal investment and financing decisions. Corporate investment and financing decisions are related to the interest of the shareholders, managers and creditors, all of whom will guide their behavior for the goal of maximizing the benefits during which there will be conflicts and disagreements inevitably causing the agency cost. Therefore, choosing a reasonable capital structure, reducing the occurrence of agency costs have become particularly important.We will discuss the problem of corporate investment and financing decisions. Here, we consider the following two cases. (H1) At the beginning, the enterprise do not have any plant, it will decide whether to build a new plant according to the price. (H2) At the beginning, the enterprise has a plant, it will decide whether to build another plant for an expansion option.This paper analyzes the investment and financing decisions in the assumption that the price is governed by a mean reversion model. First of all, we establish mathematical models in different financing policies and conduct a series of theoretical results by using real op-tion method. Then, given a range of parameter values, we make numerical experiments to show expansion price level curves and sensitivity analysis under different financing strate- gies. Combining theoretical results with the specific numerical experiment results, we draw the following conclusions.(1) The company's investment preference is somewhat different under different price volatility. When price volatility is at low levels, the manager often tend to select risky projects for their own interest, which results in over-investment problem. With the volatility increasing, creditors will demand a higher risk premium to make up for the disadvantages of asymmetric information, which will cause difficulties in corporate financing and lead to underinvestment;(2) Project cost and the rate of reversion have a significant effect on the expansion price level:the larger the cost of the project, the higher the expansion price level; the greater the rate of reversion, the higher the expansion price level;(3) Different price processes will result in different optimal expansion policies, that is, the optimal investment decisions are affected by price processes. Expansion price level tend to be higher in the geometric Brownian motion model compared to the mean reversion model under the same conditions.