- Title Pages
- Dedication
- Preface
- 1 Modern Value Quandaries
- 2 Theories of Value
- 3 The Failure of the Neoclassical Investment Rule
- 4 The Nature of the Firm
- 5 The Organization and Scale of Private Business
- 6 Accounting for the Firm
- 7 VALUE IN CLASSICAL ECONOMICS
- 8 VALUE IN NEOCLASSICAL ECONOMICS
- 9 MODERN RECURSIVE EQUILIBRIUM AND THE BASIC PRICING EQUATION
- 10 ARBITRAGE-FREE PRICING IN COMPLETE MARKETS
- 11 Portfolio Pricing Methods
- 12 Real Options and Expanded Net Present Value
- 13 Traditional Valuation Methods
- 14 PRACTICAL APPLICATION OF THE INCOME METHOD
- 15 THE VALUE FUNCTIONAL: THEORY
- 16 The Value Functional: Applications
- 17 APPLICATIONS: FINANCE AND VALUATION
- 18 Applications: Law and Economics
- Appendix A Key Formula and Notation Summary
- Appendix B Guide To The Solutions Manual
- Appendix C Description of Subject Companies
- References
- Index
The Failure of the Neoclassical Investment Rule
The Failure of the Neoclassical Investment Rule
- Chapter:
- (p.23) 3 The Failure of the Neoclassical Investment Rule
- Source:
- The Economics of Business Valuation
- Author(s):
Patrick L. Anderson
- Publisher:
- Stanford University Press
This chapter presents telling evidence that the value of a firm is not the net present value of its expected profits. This is a provocative statement, and deserves careful support: the notion that the value of investments in firms is the expected net present value of their earnings is a pillar of Finance. The author summarizes the intellectual history of this notion, and then presents six major failings of the “NPV rule,” in particular, that decision-makers often don’t follow this rule.
Keywords: Net Present Value, NPV rule, neoclassical investment rule, Modigliani-Miller, real options, entrepreneurs, Finance
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- Title Pages
- Dedication
- Preface
- 1 Modern Value Quandaries
- 2 Theories of Value
- 3 The Failure of the Neoclassical Investment Rule
- 4 The Nature of the Firm
- 5 The Organization and Scale of Private Business
- 6 Accounting for the Firm
- 7 VALUE IN CLASSICAL ECONOMICS
- 8 VALUE IN NEOCLASSICAL ECONOMICS
- 9 MODERN RECURSIVE EQUILIBRIUM AND THE BASIC PRICING EQUATION
- 10 ARBITRAGE-FREE PRICING IN COMPLETE MARKETS
- 11 Portfolio Pricing Methods
- 12 Real Options and Expanded Net Present Value
- 13 Traditional Valuation Methods
- 14 PRACTICAL APPLICATION OF THE INCOME METHOD
- 15 THE VALUE FUNCTIONAL: THEORY
- 16 The Value Functional: Applications
- 17 APPLICATIONS: FINANCE AND VALUATION
- 18 Applications: Law and Economics
- Appendix A Key Formula and Notation Summary
- Appendix B Guide To The Solutions Manual
- Appendix C Description of Subject Companies
- References
- Index
