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A Blueprint for Corporate Governance by Fred Kaen

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CHAPTER 5

CORPORATE GOVERNANCE ISSUES IN INVESTMENT DECISIONS

INTRODUCTION

In the previous chapter we saw how investors price common stock when they are making investment decisions. Here, we consider the connection between share prices and the investment decisions made by managers using net present value (NPV) analysis and the NPV rule.

Actually, the approach we take is to consider each investment project as a stand-alone independent company. In so doing, we conceptualize the company as being the sum of its investment projects—what it does for a living.

THE NPV RULE

Net present value has a precise meaning with respect to the market value of a company. The NPV of an investment project is the instantaneous change in the market value of the ...

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