Basic Introduction to Expected Value Analyses and Investments Through the Corporate Form

15 Pages Posted: 5 Feb 2019 Last revised: 10 Feb 2019

See all articles by Michael Bakker

Michael Bakker

University of Amsterdam, Faculty of Law

Roelf Jakob de Weijs

University of Amsterdam - Centre for the Study of European Contract Law (CSECL)

Date Written: February 5, 2019

Abstract

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

Suggested Citation

Bakker, Michael and de Weijs, Roelf Jakob, Basic Introduction to Expected Value Analyses and Investments Through the Corporate Form (February 5, 2019). Amsterdam Law School Research Paper No. 2019-04, Available at SSRN: https://ssrn.com/abstract=3329268 or http://dx.doi.org/10.2139/ssrn.3329268

Michael Bakker (Contact Author)

University of Amsterdam, Faculty of Law

Amsterdam
Netherlands

Roelf Jakob De Weijs

University of Amsterdam - Centre for the Study of European Contract Law (CSECL) ( email )

P.O. Box 1030
Amsterdam, 1000 BA
Netherlands

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