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

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  • Adam Brandenburger
  • Ben Polak
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    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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    Bibliographic 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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    Cited by:
    1. FU, Qiang & LI, Ming, 2010. "Policy Making with Reputation Concerns," Cahiers de recherche 09-2010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. Jason G. Cummins & Ingmar Nyman, 2000. "Optimal Investment by Financially Xenophobic Managers," Hunter College Department of Economics Working Papers 02/4, Hunter College: Department of Economics, revised 2001.
    3. Mukand, Sharun W., 2006. "Globalization and the `confidence game'," Journal of International Economics, Elsevier, vol. 70(2), pages 406-427, December.
    4. Beatriz Mariano, 2008. "Do reputational concerns lead to reliable ratings?," LSE Research Online Documents on Economics 24433, London School of Economics and Political Science, LSE Library.
    5. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc.
    6. Chung, Kim-Sau & Eső, Péter, 2013. "Persuasion and learning by countersignaling," Economics Letters, Elsevier, vol. 121(3), pages 487-491.
    7. Jason G. Cummins & Ingmar Nyman, 2002. "The Dark Side of Competitive Pressure," Hunter College Department of Economics Working Papers 02/3, Hunter College: Department of Economics, revised 2002.
    8. Ingmar Nyman, 2004. "Stock Market Speculation and Managerial Myopia," Hunter College Department of Economics Working Papers 402, Hunter College: Department of Economics, revised 2004.
    9. Matthew Gentzkow & Jesse Shapiro, 2005. "Media Bias and Reputation," NBER Working Papers 11664, National Bureau of Economic Research, Inc.
    10. Saori Chiba & Kaiwen Leong & Kaiwen Leong, 2013. "Cheap Talk with Outside Options," Working Papers 16, Department of Management, Università Ca' Foscari Venezia.
    11. Severin Borenstein & Meghan Busse & Ryan Kellogg, 2007. "Principal-agent Incentives, Excess Caution, and Market Inefficiency: Evidence From Utility Regulation," NBER Working Papers 13679, National Bureau of Economic Research, Inc.
    12. Miller, Nolan & Resnick, Paul & Zeckhauser, Richard, 2002. "Eliciting Honest Feedback in Electronic Markets," Working Paper Series rwp02-039, Harvard University, John F. Kennedy School of Government.
    13. Fu, Qiang & Li, Ming, 2014. "Reputation-concerned policy makers and institutional status quo bias," Journal of Public Economics, Elsevier, vol. 110(C), pages 15-25.
    14. Fox, Justin & Van Weelden, Richard, 2012. "Costly transparency," Journal of Public Economics, Elsevier, vol. 96(1), pages 142-150.
    15. Arnoud W.A. Boot & Todd T. Milbourn & Anjan V. Thakor, 2002. "Sunflower Management and Capital Budgeting," Tinbergen Institute Discussion Papers 02-059/2, Tinbergen Institute.

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