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A NOTE ON CORPORATE INVESTMENT DECISIONS AND OPTION PRICING
Author(s) -
Brown R. L.
Publication year - 1981
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1981.tb00026.x
Subject(s) - shareholder , payment , economics , black–scholes model , investment (military) , business , valuation of options , financial economics , actuarial science , microeconomics , finance , corporate governance , law , volatility (finance) , politics , political science
Abstract: Using the Black‐Scholes option pricing model, numerical examples are given which illustrate the known fact that shareholders in a levered firm might reject investments which are profitable for the company as a whole and accept investments which are unprofitable for the company as a whole. Even the assumption that side‐payments are allowed can be inadequate to handle a possible succession of unprofitable projects which are acceptable to shareholders. However, existing company law attempts to provide a solution procedure. The analysis helps to explain why such law has been thought necessary.