A system dynamics model of capital structure policy for firm value maximization

Abstract

The complexity surrounding the maximization of firm value agenda demands a comprehensive causal model that effectively embeds the intertwining relationships of the variables and the policies involved. System dynamics provides an appropriate methodology to model and simulate such complex relationships to facilitate decision making in a complex business environment. The objective of the study is to analyze the impact of capital structure policy, being a key managerial decision, on the firm value. For this purpose, the study develops a system dynamics‐based corporate planning model for an oil firm, including the operational as well as financial processes. Various scenarios and capital structure policies have been designed and simulated to identify the policy that helps in increasing the firm value. The results demonstrate that increase in debt percentage in capital structure mix increase the firm value.