Robust Innovation Investment Policy And Liquidity Management

As one of the most important components in a firm’s operations,corporate innovation investment helps to increase its competitiveness and profits.However,the existing corporate investment theory assume that productivity shock is exogenous,and the probability distribution is known ex ante.This assumption ignores the fact that innovational activity can increase productivity,and the probability distribution of the innovation investment result is hard to predict.After investing in innovative projects,decision makers often cannot accurately know the true probability measure of the corporate investment model,i.e.,they face ambiguity.In this case,they need to find a more robust optimal investment strategy.Therefore,based on more realistic assumptions,this paper studies robust innovation investment strategy and liquidity management of the corporate subject to financing constraints by using stochastic dynamic programming and stopping theory.It provides some theoretical insights on how to make robust innovation investment and manage liquidity and uncertainty effectively.This paper consists of the following:First,considering corporate innovation investment and model uncertainty,we construct an investment model of a financing constraint corporate under no external financing channels,as well as a liquidity management framework.In particular,by solving the value function and optimal decision policy,we get HJB equation with boundary conditions,and the first order conditions for optimal decision(robust innovation investment,physical investment and liquidity management strategy under no external financing channels).We show that,in the absence of external financing channels,when the cash-physical capital ratio of the corporate is relatively high,the less financial constraint that the firm face,ambiguity aversion enlarges the effect of external uncertainty on innovation investment.The increase of ambiguity aversion promotes the corporate to reduce innovation investment and physical investment,and finally obtains a lower firm’s value.In contrast,when the cash-physical capital ratio of the corporate is relatively low.the effect of ambiguity aversion on the innovation investment and physical investment is very little.In addition,it is worth mentioning that by introducing ambiguity on the basis of innovation investment,the research results of this paper are more in line with the reality and economic intuition than the existing research.By comparative statics analysis,we analyze the effects on investment and liquidity management strategy of the technology level of innovation,external uncertainty as well as other model parameters.Secondly,under the conditions of equity financing,credit financing and considering both equity and credit financing channels,we study the robust innovation investment and liquidity management strategy,and get a semi-closed solution for firm’s value,as well as investment and liquidity management strategy under model uncertainty.We analyze the dynamic effects and internal mechanism of ambiguity aversion on the innovation investment and liquidity management strategy.By comparison with the previous analysis and numerical results,we show that the effects of financing constraint on firm’s innovation investment,firm’s value,marginal value of cash and physical investment.Finally,under stochastic interest assumption,we extend the neoclassical q investment theory to include innovation investment.By using dynamic stochastic programming,we get robust innovation and physical investment strategy.Then we introduce leverage into the model,and connect the credit risk with the innovation investment and physical investment.Lastly,within the dynamic stochastic framework,we analyze the effects of the expectation change of interest and of the interest volatility on physical investment,innovation investment and firm’s value.In addition,we compare the dynamic differences of firm’s value,physical and innovation investment under two different ambiguity aversion cases,and shows the forecast of the real investment and innovation investment by the relative bond value and spread.