fundassetscouldendupwithanoverfundedpensionplanand
higher equity value.
There are ways of creating value from pension fund
investments,thoughsomearemorequestionablethanothers
fromanethicalperspective.Thefirstistoinvestpensionfund
assets better, generating higher risk-adjusted returns and
higher value for stockholders. The second (and more
questionableapproach)istoreducepensionfundobligations,
either by renegotiating with employees or by passing the
obligationontootherentities(suchasthegovernment)while
holding on to pension fund assets.
Value of Changing Management
Ifweconsidervaluetobetheendresultoftheinvestment,
financing,anddividenddecisionsmadebyafirm,thevalue
ofafirmwillbeafunctionofhowoptimal(orsuboptimal)
we considera firm’s management to be. If weestimate a
value for the firm assuming that existing management
practicescontinue(statusquovalue)andreestimatethevalue
of the same firm assuming that it is optimally managed
(optimalvalue),thevalueof changingmanagementcanbe
written as:
The value of changing management will be a direct
consequenceofhowmuchwecanimprovethewaythefirm
isrun.Thevalueofchangingmanagementwillbezeroina
firmthatisalreadyoptimallymanagedandsubstantialfora
firm that is badly managed.