CAPITAL BUDGETING AND INVESTMENT

DECISIONS
HERLINA YOKA ROIDA, PH.D.
UNDERIVESTMENT AND OVERINVESTMENT PROBLEMS

 The underinvestment problem is an agency problem proposed by financial economists that exists between
shareholders and debt holders, in which a leveraged company foregoes valuable investment opportunities because
debt holders would capture a portion of the benefits of the project, leaving insufficient returns to the equity
shareholders.
 The overinvestment problem is a situation in which the management of a publicly-traded company invests in too
many projects, especially when the projects do not benefit shareholders. Overinvestment may be a violation of the
management's fiduciary responsibility to shareholders, especially when the managers benefit from the
arrangement and investors do not.
UNDERIVESTMENT AND OVERINVESTMENT PROBLEMS…
QUESTION?...