Essays on firm optimal decision-making through a life-cycle and the residual momentum

Abstract

We address a typical life-cycle of a value-maximizing firm: a firm becomes more-structured firm under optimal growth option choices. First we suggest a mutual-learning model of a structured organization. More structured organization is slow to innovate under fast changing environment. Under an intuitive assumption that operating costs increase in an increasing rate with organization size, we regenerate a typical life-cycle of successful companies: fast innovation in early age, growing in size, and more structured organization in a later stage. We also estimate the residual momentum strategy in the Korean stock market and compare its performance with the Jegadeesh and Titman (1993) momentum strategy.