Corporate investment myopia – a test of the agency and net present value theories

Abstract

In the world of business, the significant factor that leads to the establishment of corporate organizations is the maximization of shareholders’ wealth. Much is expected from managers of corporate bodies – Agents, engaged by the Investors – Principals, to generate investment activities towards the attainment of the basic financial objective of maximization of shareholders’ wealth. Sometimes, the agents succeed in their endeavour to satisfy the shareholders’ interests. However, in other times, they fail to make the mark due to investment distortions termed as Investment Myopia. The researcher’s objective was to assess the extent to which the agent-principal relationship known as Agency Theory and the misapplication of investment techniques especially The Net Present Value Theory contribute to investment myopia that frustrates the maximization of shareholders’ wealth. The findings of the research revealed that the following are the contributory factors to investment myopia:  Irregular flow of information between investors and their agents.  The difference in attitude of investors and management towards risk.  Lack of a unified objective of investors and management caused by conflict of interest.  The misunderstanding of the dynamics of the Net present Value Theory. The diffusion of the effects of these contributory factors that stifle investments rests on strategies that generate a healthy relationship between agents and a sensitivity analysis of the Net Present Value Theory. University of Education,Winneba http://ir.uew.edu.