Working Paper: CEPR ID: DP16074
Authors: Reinier de Adelhart Toorop; Dirk Schoenmaker; Willem Schramade
Abstract: We investigate decision rules for corporate investment by designing a company value frontier. This company value frontier allows for balancing financial value and social and environmental impact. Different value concepts – ranging from shareholder value to shareholder welfare and integrated value – are analysed resulting in varying preferences for social and environmental impact or value. Next, these preferences are incorporated in investment decision rules. The traditional net present value (NPV) rule optimises only financial value. We propose new decision rules which include a preference for social and environmental value without neglecting financial value. In addition, we derive a tilting factor for companies that not only want to optimise new investments, but also want to correct past underinvestment in social and environmental value.
Keywords: shareholder value; shareholder welfare; integrated value; capital budgeting
JEL Codes: G3; H23; I3; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implementation of new decision rules (D79) | improved corporate outcomes regarding social and environmental impacts (M14) |
| new decision rules (D91) | better alignment with stakeholder expectations and regulatory requirements (G38) |
| new decision rules (D91) | correction of past underinvestment in social and environmental areas (H54) |
| tilting factor derived in model (C51) | optimize new investments while addressing historical imbalances in value creation (G31) |