Managerial Capital Budgeting Objectives Under Asymmetries Of Information: A Survey Of Recent Trends

Abstract

The objective function typically prescribed by finance theorists for capital budgeting decisions is the maximisation of shareholders’ wealth (MSW). The rationale for such a pre- scription is that shareholders should enjoy primacy of place as owners of the firm which, by assumption, is synonymous with ownership of capital. > When viewed from an agency perspective the shareholders are considered as principals served by their agent-managers. Nevertheless, the agency relationship in typical large major corporations is also characterised by a separation of ownership and control.¢ The economic literature concerning management's utility function, property rights and agency theory is based on the perception that managers (as agents) will seek to maximise their personal utility ina way which may conflict with the maximisation of te utility of the shareholders (principals). When the managers are perceived as self-interested utility maximisers, doubts inevitably arise abou the congruence of objectives between shareholders and managers. Given that executive control i the province of the managers and the possible existence of asymmetries of information between management and shareholders, there is obviously a potential for conflict