Shareholders' Wealth-Maximizing Operating Decisions and Risk Management Practices in a Mixed Contracts Economy

Production and Operations Management, March 2010

Posted: 18 Mar 2010

See all articles by Ramesh K. S. Rao

Ramesh K. S. Rao

University of Texas at Austin - Department of Finance

Genaro Gutierrez

University of Texas at Austin - Red McCombs School of Business

Date Written: March 17, 2010

Abstract

This paper establishes a critically important positive role for operations management practices and financial hedging. We show that operations management decisions and financial hedging are intertwined, and we advance a framework that can identify their combined effects on investors' wealth. We show that: (a) firms (publicly traded corporations) will optimally hold adequate riskless working capital (e.g., cash) to minimize the cost of obtaining non-financial inputs, and the magnitude of this cash holding depends on operating details, and (b) operations management and financial hedging can lower firms’ cash requirements, and boost productivity, defined as the wealth created in the firm per dollar of invested capital. Productivity-enhancing practices - by "freeing up" some of the firm's cash - can maximize the investors' wealth. We show that these results obtain because firms’ contracts with many of the providers of non-financial inputs are not traded, and because investors can invest not just in public corporations but also in businesses "outside the markets" (e.g., proprietorships, partnerships, and private equity).

Keywords: shareholders' wealth, operational hedging, productivity of capital, working capital, risk management

Suggested Citation

Rao, Ramesh K. S. and Gutierrez, Genaro, Shareholders' Wealth-Maximizing Operating Decisions and Risk Management Practices in a Mixed Contracts Economy (March 17, 2010). Production and Operations Management, March 2010. Available at SSRN: https://ssrn.com/abstract=1573638

Ramesh K. S. Rao (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-475-8756 (Phone)
512-471-5073 (Fax)

Genaro Gutierrez

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

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