Question

2) Why do sometimes investors and management have disagreements on how much risk to take on when thinking of investments? 3) Why is capital investment sometimes seen as voting with your feet? ie, indicating confidence in the future of the business?

Answer 1

2) Conflict of interests can primarily be the reason for disagreement. Investors can be of different types ie., May be risk averse or may have high appetite for risk. Management is more or less concerned about business growth development and prosperity. Investing is a crucial aspect of running a business. Without earning enough returns sustainance of the business will be under question. Most of the time investors and management go hand in hand as far as healthy investments are concerned be it risky or not. But when these investments has a direct impact on the investor base, investors show their disagreement. Say it for example an acquisition or merger deal has serious impacts on the market value of the company and therefore investors show disagreement fearing value dilution.

3.voting with your feet means not to support something. Yes capital investment is not a kids play. It requires rational decision making and is highly risky. Unlike other investments like bonds and debenture , returns are not stable here. There can be a year with high returns and a year with zero return. As far as the couping of amount invested is concerned it does not come with a proper te frame as in case of fixed income securities. That is risky again. Due to the mentioned reasons capital investment is a turn down for risk averse people and they vote it with their feet.