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Overinvestment and fraud

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  • Pinheiro, Marcelo

Abstract

We analyze the interactions between two managerial tasks: investing and revealing information. We assume that a manager can invest influencing the firm's quality, then he reports this quality to investors. Whenever truthful reporting is not an equilibrium, the manager has incentives to overinvest relative to shareholders. Therefore, the potential for market manipulation is the key in understanding investment policy; it is the desire to manipulate prices that leads to inefficient investment. Also, more manipulation occurs when the manager is in control, so prices are less informative. Finally, we show that the manager is better off with an exogenous reporting policy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 44 (2008)
Issue (Month): 5-6 (April)
Pages: 484-512

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Handle: RePEc:eee:mateco:v:44:y:2008:i:5-6:p:484-512

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Web page: http://www.elsevier.com/locate/jmateco

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  1. Ulrike Malmendier & Geoffrey Tate, 2004. "CEO Overconfidence and Corporate Investment," NBER Working Papers 10807, National Bureau of Economic Research, Inc.
  2. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
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  5. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
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  7. Marcelo Pinheiro, 2008. "Demand shocks and market manipulation," Annals of Finance, Springer, vol. 4(3), pages 269-298, July.
  8. Jianping Mei & Jose A. Scheinkman & Wei Xiong, 2009. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," CEMA Working Papers 504, China Economics and Management Academy, Central University of Finance and Economics.
  9. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, 04.
  10. Pinheiro, Marcelo, 2008. "Loyalty, peer group effects, and 401(k)," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(1), pages 94-122, February.
  11. 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.
  12. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  13. Daniel Bergstresser & Thomas Philippon, 2003. "CEO incentives and earnings management," Proceedings 862, Federal Reserve Bank of Chicago.
  14. J B Heaton, 2002. "Managerial Optimism and Corporate Finance," Financial Management, Financial Management Association, vol. 31(2), Summer.
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