AGENCY PROBLEMS ASSOCIATED WITH MANAGERS HAVING DISINCENTIVES TO ABANDON INVESTMENTS

Non-optimal abandonment policy can arise from managers having disincen tives to terminate projects. Statman and Caldwell demonstrate that psy chological and pecuniary disincentives cause agency costs that are bor ne by shareholders; they argue that market forces and financial manage rs are capable of eliminating or greatly reducing the agency costs. Th is paper takes the pessimistic view that, because of the phenomenon of selective filtering of information, the agency costs are not easily a verted. The agency costs are manifest by (1) overinvestment at the tim e of project initiation, (2) practices that increase the value of risk y debt, (3) poor investment policy when capital rationing exists, and (4) non-optimal working capital management decisions. Filtering of inf ormation is exacerbated by management information systems that are ina dequate to provide the quality of data needed for capital budgeting de cisions.