Basic Introduction to Expected Value Analyses and Investments Through the Corporate Form
15 Pages Posted: 5 Feb 2019 Last revised: 10 Feb 2019
Date Written: February 5, 2019
This text first of all provides a basic introduction to calculating the expected value of investments (§ 2). Secondly, it aims to illustrate how the investment decision can change if the investment is made through a limited liability company (§ 3). The key characteristic of limited liability companies can radically change the assessment of the expected value of a given investment opportunity. Because of its basic structure with shareholders without liability and creditors with recourse possibilities limited to the company itself, a project with a negative expected value can become a project with a positive expected value for the shareholders if undertaken by a limited liability company. This is problematic if one assumes that the basic goal of corporate law is to 'foster overall social welfare'.
Keywords: expected value, corporate finance, limited liability
JEL Classification: K2, K22
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