Seems misaligned. Shareholders would prefer a project that they predict will deterministically use exactly its budget to first bet all on black in a casino, then either be immediately bankrupt or able to complete and then pay out its original budget.
That is of course true for anyone who buys a call option right now as well.
Proves too much; this is similarly true of shareholders in any company with a debt+equity capitalization.
It’s true that shareholders’ incentives are not perfectly aligned with creditors’. In private corporations, this is handled with governance practices; for public megaprojects it seems like even less of an issue.
Investors would prefer to invest in moonshot megaprojects over, like, infrastructure megaprojects. Does this also prove too much?
If after 10% of the time and the budget, the startup can tell that success is very unlikely, should they be incentivized to abort? Because the current setup would seem to have them chug along until the budget is gone.
Investors would prefer to invest in moonshot megaprojects over, like, infrastructure megaprojects.
I don’t think this is true; as in corporate equity markets, the preference should be responsive to price, and equity shares should trade over naive book value, but at a price where the marginal investor is indifferent to buying more.
In fact, insofar as the Miller-Modigliani assumptions hold, any capitalization of the project in terms of equity and debt should trade at the same total price (and so, raise the same funding), just with a different mix of the total coming from the debt and the equity.
should they be incentivized to abort?
Clearly that would be ideal, but this scheme doesn’t make this issue worse than the status quo (and provides the advantage that at least there’s some market-based metric to tell you that the project is going off the rails).
Seems misaligned. Shareholders would prefer a project that they predict will deterministically use exactly its budget to first bet all on black in a casino, then either be immediately bankrupt or able to complete and then pay out its original budget.
That is of course true for anyone who buys a call option right now as well.
Proves too much; this is similarly true of shareholders in any company with a debt+equity capitalization.
It’s true that shareholders’ incentives are not perfectly aligned with creditors’. In private corporations, this is handled with governance practices; for public megaprojects it seems like even less of an issue.
Investors would prefer to invest in moonshot megaprojects over, like, infrastructure megaprojects. Does this also prove too much?
If after 10% of the time and the budget, the startup can tell that success is very unlikely, should they be incentivized to abort? Because the current setup would seem to have them chug along until the budget is gone.
I don’t think this is true; as in corporate equity markets, the preference should be responsive to price, and equity shares should trade over naive book value, but at a price where the marginal investor is indifferent to buying more.
In fact, insofar as the Miller-Modigliani assumptions hold, any capitalization of the project in terms of equity and debt should trade at the same total price (and so, raise the same funding), just with a different mix of the total coming from the debt and the equity.
Clearly that would be ideal, but this scheme doesn’t make this issue worse than the status quo (and provides the advantage that at least there’s some market-based metric to tell you that the project is going off the rails).