OVERINVESTMENT AND UNDERINVESTMENT PROBLEMS: DETERMINING FACTORS, CONSEQUENCES AND SOLUTIONS

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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 Solutions to Under&overinvestment

How to cite this paper: La Rocca, M., La Rocca, T., & Cariola, A. (2007). Overinvestment and underinvestment problems: determining factors, consequences and solutions. Corporate Ownership & Control, 5(1), 79-95. https://doi.org/10.22495/cocv5i1p7