Overinvestment and Underinvestment Problems: Determining Factors, Consequences and Solutions

33 Pages Posted: 4 Nov 2005

See all articles by Alfio Cariola

Alfio Cariola

Università degli Studi della Calabria

Maurizio La Rocca

Università degli Studi della Calabria

Tiziana La Rocca

Università degli Studi della Calabria

Date Written: October 2005

Abstract

The potential conflicts of interest between managers, stockholders and debtholders influence capital structure, corporate governance activities and investment policies, which, in turn, could give rise to inefficient managerial decisions and suboptimal investments that generally fall under the categories of problems of underinvestment and overinvestment. This paper intends to discuss these problems by identifying their causes, determining factors and the consequences on the value production processes, as well as to point out possible solutions to them. After having confronted the effects and their implications on firm governance activities by clarifying the relevance of the phenomenon and showing the main empirical data that emerged in the prevailing researches, we summarize the main financial proposals found in literature that can diminish their impact.

Keywords: Underinvestment, overinvestment, capital structure, corporate governance, financial

JEL Classification: G3

Suggested Citation

Cariola, Alfio and La Rocca, Maurizio and La Rocca, Tiziana, Overinvestment and Underinvestment Problems: Determining Factors, Consequences and Solutions (October 2005). Available at SSRN: https://ssrn.com/abstract=835364 or http://dx.doi.org/10.2139/ssrn.835364

Alfio Cariola

Università degli Studi della Calabria ( email )

87036 Arcavacata di Rende CS
Italy

Maurizio La Rocca (Contact Author)

Università degli Studi della Calabria ( email )

Ponte Bucci, Cubo 3C
Rende (Cosenza), Cosenza 87036
Italy

HOME PAGE: http://www.mauriziolarocca.it

Tiziana La Rocca

Università degli Studi della Calabria ( email )

87036 Arcavacata di Rende CS
Italy

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