This series on the theory of financial management offers insight into the roles of stockholder wealth maximization, the risk-return tradeoff, and agency conflicts as they apply to major topics in finance. The current article investigates capital budgeting. Much literature addresses this topic, with a number of articles challenging mainstream theories, some investigating agency problems, and a few empirically testing the relationships taught in most managerial finance classrooms.
<p class="MsoNormal" style="text-justify: inter-ideograph; text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">The following article represents the first in a series dedicated to presenting students the opportunity to better understand the key theoretical constructs in the introductory financial management course.<span style="mso-spacerun: yes;"> </span>The current essay offers an introduction to the series and covers the topics of stockholder wealth maximization and its close cousin, agency theory.</span></span></p>
<p class="MsoNormal" style="text-align: justify; line-height: normal; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-family: "Times New Roman","serif"; font-size: 10pt;">Recent literature in behavioral finance has contradicted the notion of efficiency of markets.<span style="mso-spacerun: yes;"> </span>Greater emphasis on how psychological biases influence both the behavior of investors and asset prices has led to a strong debate among proponents of behavioral finance and neoclassical finance.<span style="mso-spacerun: yes;"> </span>This has created the need to study how psychology affects financial decisions in households, markets and organizations.<span style="mso-spacerun: yes;"> </span>This study conducts a pooled ordinary least squares (OLS) model using the fixed effects estimator to investigate the linkage between investor sentiment and stock prices for 35 firms belonging to three different industries over a time period of 56 years, from 1950 to 2005.<span style="mso-spacerun: yes;"> </span>The findings suggest that investor sentiment does not significantly affect the stock prices in this sample.</span></p>
The third in a series of theoretical essays intended to supplement the introductory financial accounting course, this article is dedicated to the treatment of inventory and its related conceptual connections. In addition, this paper addresses inventory measurement dilemmas, describes scandalous accounting episodes that have made the headlines, and offers both theoretical and empirical studies about inventory that might be of interest to both students and professors.
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