Skip Navigation



RFS Advance Access published online on August 11, 2003
Review of Financial Studies, doi:10.1093/rfs/hhg023
Review of Financial Studies © The Society for Financial Studies 2003; all rights reserved
This Article
Right arrow Advance Access manuscript (PDF)
Right arrow All Versions of this Article:
17/1/239    most recent
hhg023v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Berkovitch, E.
Right arrow Articles by Israel, R.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?


© 2003 The Society for Financial Studies

Original Articles

Why the NPV Criterion Does Not Maximize NPV

Elazar Berkovitch 1* and Ronen Israel 1
1 Interdisciplinary Center, Herzliya (IDC)

* To whom correspondence should be addressed. E-mail: elib{at}idc.ac.il.


  Abstract

This article presents a theory of capital allocation that shows how the use of net present value as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use net present value to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 REV FINANC STUDHome page
A. E. Bernardo, H. Cai, and J. Luo
Motivating Entrepreneurial Activity in a Firm
Rev. Financ. Stud., March 21, 2008; (2008) hhn029v1.
[Abstract] [Full Text] [PDF]


Disclaimer:
Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.