Control of Dividends, Capital Subscriptions, and Physical Inventories
What is the opportunity cost of separating operational and financial decisions in large manufacturers such as Proctor and Gamble? Decentralization was unavoidable until enterprise-wide information systems were in place, but technology has long been adequate to coordinate financial and operational decisions. What does coordination entail and what is its financial value? We analyze a bare-bones model of a manufacturer with the goal of maximizing the market value of the firm. This criterion often guides financial decisions, but operational decisions are typically driven by profit or cost criteria. The operational decisions are production and inventories in response to risky product demand, and the financial decisions are short-term loans and dividends. The key finding is that large improvements in the market value of a firm can sometimes be made by properly coordinating heretofore-separate operational and financial decisions. Neither function can accomplish the improvements independently merely by using the right type of decision rule; true coordination is essential.