The financial value of corporations in a cobweb economy

Francis Declerck (Department of Finance, ESSEC Business School Paris‐Singapore, Cergy‐Pontoise, France)
L. Martin Cloutier (Department of Management and Technology, School of Management, University of Quebec at Montreal, Montreal, Canada)

International Journal of Wine Business Research

ISSN: 1751-1062

Publication date: 24 August 2010

Abstract

Purpose

The purpose of this paper is to present a model and simulation results for the corporate financial value of an industry in a cobweb economy. Production‐consumption cycles affect profit and financial needs in terms of equity and debt capital, and thus corporate value over time. The model is applied to the Champagne industry.

Design/methodology/approach

The paper simulates the financial value of Champagne makers by taking into account developments on the Champagne market and the short‐ and long‐term responses by input suppliers and Champagne makers. Financial modeling is combined with a vertical coordination model of production and consumption in a cobweb economy.

Findings

This paper makes theoretical advances in modeling the impact of short‐ and long‐run temporal tensions in production decisions on the financial value of processors. Temporal tensions are central to the decisions made by input suppliers (grape growers) and processors (Champagne makers) as they negotiate in a context of vertical coordination in a cobweb economy. Financial aggregates are forecast by the model and used as market multiples for estimating corporate financial value. Furthermore, this research strengthens previously published simulation studies in agriculture and food markets since system dynamics (SD) is applied in modeling both input production and consumption and the processor's financial value. SD modeling is well suited to simulation in a critical context, and Champagne makers find themselves in such a context: the Champagne protected designation of origin (PDO) area has reached its legally authorized size limit, while world demand continues to grow.

Practical implications

The market for corporate control of Champagne makers is active. The model presented is a useful guide for decision makers because it improves the anticipation of corporate value and improves understanding of the future of value creation in a legal framework currently considering revision of both authorized annual yield (short‐run decision) and the size of the appellation area (long‐run decision).

Originality/value

Two original features of this paper add specific value to the existing research: first, the theory is enlarged to capture the temporal tensions affecting decision making by input suppliers and processors operating in a cobweb economy, and deduce processors' financial value using financial aggregates forecast by the model. Second, the SD simulation method is applied in modeling input production and consumption and processors' financial value.

Keywords

Citation

Declerck, F. and Cloutier, L. (2010), "The financial value of corporations in a cobweb economy", International Journal of Wine Business Research, Vol. 22 No. 3, pp. 269-287. https://doi.org/10.1108/17511061011075392

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

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