Open AccessInvestor Protection and Capital Expenditures under Endogenous Time Inconsistency
Author(s) -
Richard Paul Gregory
Publication year - 2019
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v8n2p43
Subject(s) - information asymmetry , agency cost , agency (philosophy) , economics , principal–agent problem , microeconomics , capital (architecture) , value (mathematics) , cost of capital , capital expenditure , business , finance , corporate governance , incentive , shareholder , history , philosophy , archaeology , epistemology , machine learning , computer science
Underinvestment in value-enhancing projects is considered a major problem in corporate management. It is usually blamed on information asymmetry and agency costs. In this paper, a model is proposed that shows that even without information asymmetry and agency costs, there is a pronounced tendency for managers to underinvest due to a positive probability of their being replaced. It is also shown that investor protection legislation, if it does not eliminate the possibility of being replaced, does not lower the likelihood of underinvestment.