Dynamic Dividend and Investment Decisions in Value Added Firms: An Application to Farmer Owned Ethanol Plants

The paper analyzes the dynamic interaction between dividend and investment by adopting numerical methods in a growth framework. Two benchmark models are introduced and their modified version for ethanol production is particularly studied. The transition path supports the trend of smoothing procedure and approximately follows plant’s life cycle. After ethanol plants achieve the mature size, impulse response functions and moment properties for dividend and investment associated with margin shocks and interest rate shocks are computed numerically. The result suggests that investment amount is adjusted in wide range and dividend decision is highly associated with cash flows available in ethanol plants.