Investor Protection and Capital Expenditures under Endogenous Time Inconsistency

Richard P. Gregory

Abstract


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.


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DOI: https://doi.org/10.5430/afr.v8n2p43

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Accounting and Finance Research
ISSN 1927-5986 (Print)   ISSN 1927-5994 (Online)

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