The underinvestment hypothesis: A property rights thesis

Jonas Daniel Sørensen

Student thesis: Master thesis

Abstract

The purpose with the present master thesis is the study of agency within the economic organization of the firm with allusions of an underinvestment hypothesis. The thesis postulates the remedy of underinvestment is attainable through real option analysis. Initially, the theoretical literature review provides an account of the abstract intrinsic to knowledge contextual to the firm through six theories from different scholarly disciplines. First, the review points to knowledge as information about the comparative economic organizational performance of the firm parallel to the industry and economy. Second, the review points to knowledge as experience of skills, routines and heuristics in the conduct of economic organization. Second, the review points to knowledge as the comprehension of creative destruction, the oxymoron of knowledge management and human behavioral propensities in economic organization. Fourth, the review points to knowledge as wisdom of managerial selective intervention and excessive control to foster extrinsic motivation and cultures permeated with defensive routines as signified by obsolete economic organization. Empirical knowledge underpinning systemic underinvestment is found in the United States of America in the period throughout the seventies and the start of the eighties, however, Denmark has yet to experience analogous incidences of systemic underinvestment. The insights attained are leveraged in a stepwise causal model of explanation. The initial contractual model identifies the conflict of interest inherent to agency and the imperative provision of incentives. The subsequent contractual model points to that explorative project cannot be incentivized strongly due to causality implications of incremental efforts. A contractual externality is spawned by the managerial responsibility, whereas strategic management bridges exploitative and explorative project candidates. Thus, theory points to the reduction of managerial incentives to encompass explorative projects. The author suggests real options analysis to ameliorate the technical underinvestment inherent to the static net present value appraisal and point to the anthrax vaccine candidate under preclinical development by Bavarian Nordic for testing the financial synthesis. The contingent net present value is estimated at the positive value of DKK 11.94m as of Friday the 20th of August upon closing of NASDAQ OMX Cph. The thesis is rejected, whereas underinvestment is spawned by the implicit disparity of risk perceptions amongst the risk-neutral principal and the risk-averse agent.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2010
Number of pages179