A decision theory approach to determine a capital joint venture structure: A manager view Academic Article uri icon

abstract

  • The literature on 'capital joint venture is reviewed to suggest a decision theory framework by which a single company may decide on its capital share in developing a new project. The focus is on the manager ': view of the capital joint venture as a risk ieduction means of his own. Concepts from reliability theory were borrowed to analyze the optimal'share and the factors influencing it under an exponential utility form. Further, the probability distribution of the new project was contaminated with a probability mass for a negative net gain, designating failure of the project. Both analytical and numerical results show, as expected, that portfolio diversification is desirable for a risk averse manager, but the optimal ownership ratio of the new project is quite insensitive to correlation of the existing and new projects. On the other hand, it is very sensitive to the probability and the cost of failure of the new …

publication date

  • January 1, 1995