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Do Short-Term Objectives Lead to Under- or Overinvestment in Long-Term Projects?

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  • Bebchuk, Lucian Arye
  • Stole, Lars A

Abstract

The authors examine managerial investment decisions in the presence of imperfect information and short-term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long-run projects. The authors show that short-term objectives and imperfect information may also lead to overinvestment and they identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long-run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur. Copyright 1993 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 2 (June)
Pages: 719-29

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Handle: RePEc:bla:jfinan:v:48:y:1993:i:2:p:719-29

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Cited by:
  1. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165 Elsevier.
  2. Guido Friebel & Sergei Guriev, 2004. "Earnings Manipilation and Incentives in Firms," Working Papers w0055, Center for Economic and Financial Research (CEFIR), revised Oct 2005.
  3. Agarwal, Sumit & Chiu, I-Ming & Souphom, Victor & Yamashiro, Guy M., 2011. "The efficiency of internal capital markets: Evidence from the Annual Capital Expenditure Survey," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 162-172, May.
  4. Efraim Benmelech & Eugene Kandel & Pietro Veronesi, 2008. "Stock-Based Compensation and CEO (Dis)Incentives," NBER Working Papers 13732, National Bureau of Economic Research, Inc.
  5. Didier, Tatiana & Rigobon, Roberto & Schmukler, Sergio L., 2011. "Unexploited gains from international diversification : patterns of portfolio holdings around the world," Policy Research Working Paper Series 5524, The World Bank.
  6. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2009. "The long and the short of emerging market debt," Policy Research Working Paper Series 5056, The World Bank.
  7. Philippe Aghion & Jeremy C. Stein, 2004. "Growth vs. Margins: Destabilizing Consequences of Giving the Stock Market What it Wants," NBER Working Papers 10999, National Bureau of Economic Research, Inc.
  8. Chirinko, Robert & Garretsen, Harry & Sterken, Elmer, 2003. "Corporate control mechanisms, voting and cash flow rights, and the performance of Dutch firms," CCSO Working Papers 200309, University of Groningen, CCSO Centre for Economic Research.
  9. Goldman, Eitan & Strobl, G√ľnter, 2013. "Large shareholder trading and the complexity of corporate investments," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 106-122.
  10. Rahaman, Mohammad M., 2014. "Do managerial behaviors trigger firm exit? The case of hyperactive bidders," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 92-110.
  11. Laux, Volker, 2012. "Stock option vesting conditions, CEO turnover, and myopic investment," Journal of Financial Economics, Elsevier, vol. 106(3), pages 513-526.
  12. Li, Xiaoyang & Low, Angie & Makhija, Anil K., 2011. "Career Concerns and the Busy Life of the Young CEO," Working Paper Series 2011-4, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  13. Peggy M. Lee, 2005. "A comparison of ownership structures and innovations of US and Japanese firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 39-50.
  14. John Thanassoulis, 2013. "Short-Term Shareholders, Bubbles, And CEO Myopia," Economics Series Working Papers 663, University of Oxford, Department of Economics.

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