A situation that arises when a company invests (in fixed assets) more than it needs to compensate for depreciated assets. In this case, the company’s capital expenditure (CAPEX) exceeds its annual depreciation requirements. If an overinvestment doesn’t lead to a healthy expansion of a company’s operations and capacity then it would merely be a waste of resources. Overinvestment is usually undertaken by mangers who tend to overspend free cash flow (FCF) in unprofitable investment projects that could not create value to their firms and could only benefit the so-called manager entrenchment strategies. As such, the costs of overinvestment can be deemed as part of a broader host of costs known as the agency costs.
August 6, 2024
