Do shareholders care about corporate investment returns?

Olli Haltia and Mikko Leppämäki
Additional contact information
Olli Haltia: European Investment Bank, Luxembourg
Mikko Leppämäki: Research Unit on Economic Structures and Growth, Department of Economics, University of Helsinki, Finland

Finnish Economic Papers, 2000, vol. 13, issue 1, 19-27

Abstract: This paper considers the apparent contradiction between the results of Artto (1997), who claims that shareholders in the paper industry have gained reasonable returns, and Pohjola (1996), who argues that a large shareholder value has been lost (the Artto–Pohjola Paradox). We show under fairly general conditions that the shareholders may enjoy reasonable return while the managers are simultaneously destroying value of the firm by allocating funds to bad investments. In this case the firm’s shareholders suffer an opportunity loss equal to the value that could have been created if the firm had paid the funds out to them and they had invested the funds in equivalently risky projects. The paradox occurs if the growth rate of a firm’s market value of equity is high enough to guarantee a nonnegative return for the shareholders but too low in the sense that the shareholders would have earned more had the funds invested at the return (at least) equal to the opportunity cost of capital. Our results support Jensen’s (1986) argument of the incentives of corporate managers to invest inefficiently, since here the shareholders do not necessarily challenge the management due to the fact that they may be perfectly happy and satisfied in financial terms.

JEL-codes: D24 G31 L73 (search for similar items in EconPapers)
Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.taloustieteellinenyhdistys.fi/images/stories/fep/f2000_1b.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fep:journl:v:13:y:2000:i:1:p:19-27

Access Statistics for this article

More articles in Finnish Economic Papers from Finnish Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Editorial Secretary ( this e-mail address is bad, please contact ).