When (i.e., under what conditions) might managers, working on behalf of shareholders, take on risky but negative NPV

Question

When (i.e., under what conditions) might managers, working on behalf of shareholders, take on risky but negative NPV projects?

Help In Homework · Accepted Answer

Managers might be taking on a risky but negative net present value project in certain circumstances-

A. When the company will have a risk related to insolvency and they want to make the company sustain and survive through any circumstances they will be taking up on a risky but negative net present value project because they are working upon the probability of a very low level of success as they feel that if the project is successful the company will survive.

B. They will also undertake negative net present value project when they will feel like higher degree of insecurity from hostile takeover so they will be trying to destroy their own value.

Hence, These are the situation under which managers who are working on the behalf of the shareholders will try to undertake risky projects which can be negative net present value projects.