The Effect of Managerial Ability on Investment Efficiency

Investment efficiency in a conceptual framework means the acceptance of the projects with positive NPV, and investment inefficiency means rejecting these investments opportunities (underinvestment) or investing in projects with negative NPV (overinvestment). One of the factors that has especially effect on the investment efficiency or inefficiency is management ability. Management ability has positive and negative aspects. Based on the positive side and according to a view as efficient contracts view it does expect that as much as manager’ ability would be high, they can better estimate the risk and return of investment projects and furthermore they predict accurately revenues and costs of the projects. In general, in this approach their selected projects are more efficient. On the other hand according to self-interest perspective, competent managers has much emphasis on [their standing]. Therefore they may choose projects that meet their interests in the first place and in consequence, they choose investment projects that are not enough efficient.