Interface of capacity expansion, capital market, and financial constraints

Abstract

This thesis investigates the capacity expansion in the interaction between the operational and financial contexts. Estimating demand before a firm expands its capacity is a key activity in operations management, but it is difficult and unlikely to be observed by researchers and practitioners when the market is imperfectly competitive. This thesis uses the index share to identify demand, realising the simultaneity of matching demand with supply in the empirical capacity expansion. Moreover, the operating and financial performance effects of capacity expansion are also worth investigating, as these reflect the firm’s profitability and financial reaction associated with capacity expansion. In this thesis, firm profit, stock return, and firm value are applied to measure the performance outcomes, and the influence of index share is also considered to build the interaction of capacity expansion and financial implication. In addition, as a significant expenditure in the process of capacity expansion, particularly in the semiconductor manufacturing sector, fixed cost plays a critical role in determining capacity policy; however, only few studies have investigated this due to the discontinuity and nonlinearity derived from the consideration of fixed cost. An economic structure is employed to figure out this issue and compare the models with and without fixed cost based on different measuring criteria. Therefore, the interactive relationships of capacity expansion decision with demand, firm performance, and fixed cost are well investigated in the thesis. To evaluate models, an empirical case of the semiconductor manufacturing sector is used for each topic, where data are obtained from US-listed semiconductor manufacturing firms in the iShares PHLX semiconductor ETF (SOX) from 2006 to 2010. Drawing on findings and outcomes specified in the empirical estimates and counterfactual analyses, many managerial implications are proposed; for example, the debtholder may prefer to invest in firms with small index share as they facilitate capacity expansion through fully utilising financial funding. This thesis contributes to the operations-finance interface in many ways. In general, the studies of interaction between operational and financial decisions, such as capacity expansion and debt, are advanced and extended through building systematic frameworks of simultaneous determinates. Moreover, with the use of Bayesian estimation, the theoretical models are empirically examined; for instance, the important role of fixed cost on capacity expansion and supply chain coordination is verified by the case of the semiconductor manufacturing sector. Besides, the methodology proposed in this thesis can be extended to more general forms and is applicable in the empirical analyses for other sectors, including the automobile and chemical industries.

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