Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 4

Biotech Inc. is a new company that invests in technologies relating to the use of plants in drugs. The stock market perceives that the company has the potential to generate large profits once it develops a line of products. To date, however, the company has not reported positive profits and does not anticipate doing so over the next 5 years or more. The owners of Biotech are particularly concerned about the investment choices of the managers. They are concerned that the managers do not have the right incentives to choose value-maximizing investments. They are considering adopting an EVA evaluation and compensation plan for the managers. Do you think this is a good idea Explain.