Essays in Corporate Finance
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- Department of Geography 
Firm value creation and maximization is the primary objective of any firm and the most debated issue in corporate finance. Firms operate in the market to create value for the stakeholders. Valuation plays its role in many areas such as mergers and acquisitions, portfolio management and corporate finance. Corporate finance focuses on maximizing the value through the corporate strategy development, policy design, and financial decisions, as the value can be directly influenced by the decisions a firm makes, such as investments it makes, how they are financed, and the dividends offered. Feedback mechanisms formed by the variety of physical and managerial processes in the firm, the associated physical and financial accumulation processes, and their synergies formed by the non-linear interrelationships between them, contribute to the dynamic complexity of firm value creation and thus to its maximization over time. To manage the firm value effectively over time, strategic planning is called for, that aims at translating the corporate objectives into policies that govern the resource allocation decisions. A variety of tools are employed for strategic planning purposes. The inadequacy of long- range planning tools is, however, a commonly cited reason for corporate failure to achieve the stated objectives. Specifically, the complexity is at the core of strategic corporate finance management, yet research on that complexity has rarely been the subject of non-linear, dynamic feedback analysis. This dissertation enriches the corporate finance literature that deals with the firm value maximization by exploring the dynamic complexity of firm value maximization objective in the oil and gas sector, that is associated with high risk and return. The dissertation uses an international oil and gas firm, Equinor, headquartered in Norway, as a case. In its very nature, the oil and gas sector is very complex and the decisions made are characterized by uncertainty. For example, long-term and irreversible investment decisions are made based on uncertain and volatile oil price expectations. Thus, the value creation and its maximization become challenging and requires a systemic approach to the strategy development, policy design and decision making, - an approach that can account for the prevailing complexity characterizing both the firm and the environment in which it operates. Despite the extensive literature that exists on this topic, the debate on how strategies, policies and the resulting decision making affect the variety of physical and financial processes in such a firm, and how the interaction between these processes determines the outcome performance, i.e., the value creation and maximization over time, is sparse. Thus, the core objective of this dissertation is to contribute to the understanding of firm value creation and maximization. For this purpose, the dissertation applies the system dynamics method to address the five major research questions, - each at the core of an article. System dynamics is suitable for this study because it enables us to represent and analyze the non-linear feedback mechanisms and the associated accumulation processes, all present in a firm aimed at maximizing its value. It thus provides us with tools to adequately address the complex dynamic problems and to design and assess the impact of policies over time. The dissertation consists of an overall introduction followed by five articles. The purpose of the first article is to address the impact of the investment policy on the firm value in the presence of uncertain oil prices and, moreover, to propose an investment policy, that maximizes the firm value, given the prevailing oil and gas price expectations. The article documents a system dynamics model that portrays the case firm, incorporating the aggregated financial and physical processes of the firm required to produce oil and gas. The model operationalizes the discounted free cash flow (DCF) valuation method applied to perform the valuation of the firm. Testing various policy alternatives for the investment policy reveals that increasing the volume of investments over the current volume, reduces the cash flows and the total firm value over the first twenty years of the simulation period, but it increases the firm value thereafter as the new investments then yield returns. However, the investment policy which assumes a higher volume of investments than the current level decreases the market price per share, which is quite counter intuitive that I explain as follows. The capital required to finance the increased volume of investments requires issuance of higher number of shares that leads to decrease in the market price per share. The results highlight the short- term versus long-term trade-off faced by the firm managers; either to lower the volume of investments compared to the current level to increase the market price per share in the short- run, or to increase the volume of investments compared to the current level to realize the increased market price per share in the long-run after affording decreased market price per share in the short-run. The second article addresses the financing policy as a tool to enhance the firm value. The article builds on the base model from the first article and incorporates a module that incorporates the causal relationships between the factors that make up the financing policy, - as postulated by the theories. Various policy alternatives of debt and equity mix are analysed under different scenarios to assess their impact on the firm value and to identify the financing mix that maximizes the firm value. The simulation results reveal that increasing the debt percentage in the financing mix of the firm increases the total firm value and the market price per share and vice versa. The third article analyses the impact of dividend policy on the firm value and proposes the best combination of investment, financing, and dividend policies for the firm value maximization. Building on the system dynamics model developed in article 2, this article integrates a dividend policy by adding a structure based on the relevant theories. Various dividend policy alternatives and scenarios combinations have been simulated and analysed to identify the policies that maximize the market price per share. The simulation results reveal that lowering the volume of investments, increasing the percentage of debt in the financing mix, and lowering the dividend payment increases the market price per share as compared to the base case that assumes that the firm continues with the current policies. These policies lead to the increased future cash flows of the firm and reduced discounting rate, thus increased market price per share as per the discounted cash flow method. This study has implications for the policy makers and concludes that the combined outcome of the policies should be considered to achieve the value maximization objective. Article 4 develops a model of exchange rate determination and forecasting to provide a reasonable long-term forecast for the exchange rate. As described by the interest rate parity (IRP) and the purchasing power parity (PPP) theories, the model developed for article 4 incorporates the nonlinear relationships between the exchange rate and the macroeconomic factors, including the interest rate, inflation, per capita income, terms of trade and the oil prices. The simulation results reveal that the model can mimic reasonably well the historic behavior of long-term exchange rate and thus provides insightful long-term forecasts for the future development of the exchange rate. This study has implications for individuals, businesses, and the Government because they are affected directly or indirectly by the exchange rate movements, and the study contributes to the debate on exchange rate determination and forecasting. Article 5 explores as how the changes in exchange rate (i.e., appreciation or depreciation of the local currency) influence the value of an international firm – the case firm. The study integrates the system dynamics-based model from article 4 into the model developed in article 3 to endogenize the exchange rate and analyze its impact on value of the case firm. The results reveal that an appreciation of the local currency, Norwegian Kroner (NOK), against the US dollar leads to an increase in the market per share of the firm. The simulation results are quite counter intuitive and oppose many studies that report the positive influence of depreciation of local currency on firm value. The study has implications for the policy makers of the firm as well as Norway because any change in the macroeconomic factors and the consequent change in the exchange rate have an impact on the case firm as well as the Norwegian economy, as the case firm is a major contributor to the Norwegian exports. Understanding of the key factors involved and their impact on any possible change is vital to effectively manage the firm as well as the economy. Overall, the five articles contribute to the firm value creation and maximization debates on the methodological, the conceptual as well as the applied level. The dissertation contributes to the conceptualization of the elements involved to manage the firm to maximize the firm value, as well as the strategy (combined set of policies) and its underlying decisions that may help enhance the firm value while considering the macroeconomic factors beyond the control of a single firm. The dissertation translates the relationships between investment, financing, and dividend policies as well as macroeconomic factors to determine the exchange rate as described by the prior published theories into a system dynamics model and extend the span of the methodologies applied to study these intertwining relationships and the resulting firm value. The use of system dynamics, its peculiar focus on the accumulation processes and nonlinearities prevalent in the structure of the system that drive the behavior, reveal that the strategies and the policies are subject to organic, endogenous, and dynamic interactions that can contribute to the enhancement or detraction in the firm value. Thus, along with contributing to the discipline specific knowledge, the dissertation advocates the complementary benefits of system dynamics that facilitates the integration of the relationships described by different theories in a comprehensive model to prescribe the actions taken by the decision makers (resulting from the strategies developed and policies designed) to manage the firm to create the value and maximize it over time.
Består avPaper 1: Khan, A., Qureshi, M. A., & Davidsen, P. I. (2020). How do oil prices and investments impact the dynamics of firm value? System Dynamics Review, 36(1), 74-100. The article is available at: https://hdl.handle.net/11250/2732725
Paper 2: Khan, A., Qureshi, M. A., & Davidsen, P. I. (2021). A system dynamics model of capital structure policy for firm value maximization. Systems Research and Behavioral Science, 38(4), 503-516. The article is available at: https://hdl.handle.net/11250/2730852
Paper 3: Khan, A., Qureshi, M. A., Policy analysis to maximize the Firm Value: Performing Firm Valuation using system dynamics. Not available in BORA.
Paper 4: Khan, A. (2020). A System Dynamics Model of Exchange Rate Determination and Forecasting. SEISENSE Journal of Management, 3(4), 44-55. The article is available in the thesis. The article is also available at: https://doi.org/10.33215/sjom.v3i4.367
Paper 5: Khan, A., Qureshi, M. A., Modelling the dynamics of firm valuation: An assessment of impact of exchange rate fluctuations on firm value using system dynamics. Not available in BORA.