“…Techniques now embedded in the domain of Accounting and Finance theory such as DCF analysis reflect an economic rationality which is increasingly being challenged (Jones & Dugdale, 1994;Dempsey, 1997;Northcott, 1991;Tomkins et al, 1996).…”
“…Techniques now embedded in the domain of Accounting and Finance theory such as DCF analysis reflect an economic rationality which is increasingly being challenged (Jones & Dugdale, 1994;Dempsey, 1997;Northcott, 1991;Tomkins et al, 1996).…”
“…At this stage, ultimate endorsement of an investment proposal is likely viewed as an endorsement of the proposer(s) or as a reflection on the track record, prestige, and/or political influence of the proposer(s)/department (e.g., Ross, ; Mukherjee and Henderson, ). Dempsey () considers the role that managerial credibility has to play in capital investment appraisal by quoting one financial director:If you get a project and do it well, then you go onto the next one. And then you'll be given more opportunity.…”
Section: Corporate Management and Strategymentioning
confidence: 99%
“…A successful decision maker depends more on an ability to anticipate problems along with an ability to recognize a range of alternative courses of action than on an ability to carefully choose between them. Hence, perhaps, the following managerial response to academic enquiry into their decision making quoted by Dempsey (): ‘It's a matter of applying judgement and common sense. You guys overcomplicate these matters—it's like I know when the house needs painting!’…”
Section: Corporate Management and Strategymentioning
confidence: 99%
“…Having removed the invisible hand of a cost of financial capital as that which works to coordinate the provision and utilization of investment finance in well‐functioning markets, we are obliged to postulate alternative mechanisms of coordination. Dempsey () acknowledges that NPV calculations cannot realistically capture the subjective and strategic dimensions of the investment decision and argues that corporate financial activity is more appropriately recognized and understood within a framework of (i) reputations based on past performance and (ii) commitment and trust relationships. For example, important investment decisions are made by personnel who have built their reputations based on their past performance; the firm's clients respond to reputation and integrity; and reputation, status, and influence are dependent on commitment and trust relationships within and outside the firm.…”
Section: Towards a Corporate Management Context For Business Finance:mentioning
The Modigliani and Miller (MM) propositions provide a foundation for corporate finance theory. Nevertheless, this paper argues that their adoption has led to a disengagement of such theory from the humanity of business, as well as, more broadly, from concepts of corporate strategic management. As a result, the context within which textbooks allow corporate investment and financial decisions to take place is severely distorted from reality. The paper argues that we require the context of behavioural and strategic corporate management if we are to accommodate the reality of business, the behaviour of formalised groups, and an ethical dimension to business. This paper argues that the focus on the Modigliani and Miller (MM) propositions as the foundation of corporate management has led to a stylized representation of corporate financial decision making that is far removed from reality. Specifically, it has brought about a disengagement from the behavioural and corporate strategic contexts within which corporate financial decision making actually functions.It is not, I note, a case of whether the MM propositions are 'right' or 'wrong'. It is, for example, possible to build a working model of the solar system with the Earth at the centre (such a model existed at the time of Copernicus) but this model has distorted what is actually central and therefore cannot be extended to understanding the universe outside the solar system. The model is more or less exhausted. Similarly, with MM theory, the problem is that experiences are not actually illuminated by the model's core assumptions, but by postulating contradictions to those assumptions. The model 'can go no further'. The broader galaxy of strategic corporate management, the elements of reputation and trust underlying corporate and financial activity, and recognition of an ethical dimension to behaviour are outside its domain.
“…Finally, a deeper analysis on the limitations of WACC paradigm and the convenience of shifting towards an institutional-behavioral paradigm has been advocated by Dempsey (1996).…”
Section: D) Criticism Against the Current Cost Of Capital Usagementioning
This paper sets forth another contribution to the long standing debate over cost of capital, firstly by introducing a multiplicative model that translates the inner structure of the weighted average cost of capital rate and, secondly, adjusting such rate for governance risk. The conventional wisdom states that the cost of capital may be figured out by means of a weighted average of debt and capital. But this is a linear approximation only, which may bring about miscalculations, whereas the multiplicative model not only takes account of that linear approximation but also the joint outcome of expected costs of debt and stock, and their proportions in the capital structure. And finally, we factor into the cost of capital expression a rate of governance risk.JEL codes: G30, G32, G34
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