nates the stock price (PCS) equation, as is found in Ben-Zion (1984), for all
years, with the noted exception of 1981.
Extensions of the Simultaneous Equations Approach
After developing the original simultaneous equations model of stock price
valuation based on the 303-firm Compustat sample, Guerard and McCabe
(1992) and Guerard, Bean, and Stone (1990) explored several extensions.
This section reexamines two of those extensions based on the availability of
the NSF/Census data. A multicriteria model was developed from the imper-
fect markets hypothesis (Guerard, Bean, and Andrews 1987). It was used to
determine the research, dividend, and investment allocations, as well as the
external financing levels, needed to maximize a firm’s common stock price
relative to its asset base. Regression coefficients from the three-stage least
squares model were used as inputs to a multiple-goal linear programming
model that minimizes the firm’s underachievement or overachievement (rel-
ative to industry averages) of allocations among the financial variables that
impact common stock prices. A firm that is interested in minimizing the un-
derachievement of desired research, investment, and dividend expenditures
and the overachievement of desired levels of debt in order to maximize its
share price can use the goal programming model to determine the appropri-
ate financial decisions. The objective function of the linear programming
model may be written as:
whered 1 = underachievement of desired research expenditures
d 2 = underachievement of desired investment expenditures
d 3 = underachievement of desired dividend payments
d 4 = overachievement of desired external financing
p= priority goal programming levels
Guerard, Bean, and Andrews (1987) estimated this model for a firm se-
lected at random from the 303-firm Compustat database for 1982. The
sample firm’s R&D, capital, and dividend allocations were less than the in-
dustry average for firms with its asset base, and its new debt was greater
than the industry average, as shown in Table 7.8.
A question that might be raised by this firm’s management is whether a
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