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When Managers Cover Their Posteriors: Making the Decisions the Market Wants to See

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Author Info
Adam Brandenburger
Ben Polak
Abstract

The stock market has opinions as to what choices firms should make. We show that concern for current share prices may lead managers to make these choices rather than those suggested by their own superior information. Even when arbitrarily many privately informed firms have to make a similar decision, the market's "prejudices" may still prevail. We compare the distortions that arise from share-price maximization with those due to herd behavior among profit-maximizing firms, and show that the former results in strictly less efficient use of information.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28199623%2927%3A3%3C523%3AWMCTPM%3E2.0.CO%3B2-M&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 27 (1996)
Issue (Month): 3 (Autumn)
Pages: 523-541
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Handle: RePEc:rje:randje:v:27:y:1996:i:autumn:p:523-541

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