This grant funds the development of an NSF proposal to 1) investigate the effects of price dynamics on the profitability of real investments in manufacturing and 2) evaluate the power of modern investment evaluation methods, including real options and portfolio optimization methods, in predicting the effects of price dynamics. The study that would be proposed would include a theoretical portion to integrate financial profit models, production profit models, and economic models of price dynamics, as well as empirical tests to evaluate the power of each model in predicting firm and shareholder profits. The grant funding will be used in planning the study that will be proposed. The planning activities will include developing at least one integrated model to demonstrate the efficacy of this approach, identifying data sources, and developing one or more case studies.
The impact of the eventual research would include identifying which characteristics of price and output dynamics are the most important predictors of profitability, and generating evidence to support or refute the applicability of finance-based profit models to real investments in manufacturing. These results will be especially important for manufacturers that are considering conservation investments, supply contracts or vertical integration to reduce price risk, or diversifying their inputs or outputs-for example, a carpet fiber manufacturer considering a process that uses biomass instead of petroleum-based materials.
