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Stock Market Speculation and Managerial Myopia

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Author Info
Ingmar Nyman () (Department of Economics, Hunter College)

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Abstract

This paper extends the analysis of managerial share price concerns by allowing informed trading in the stock market. It is shown that because they decrease the manager's information advantage vis-à-vis the stock market, individual investors who trade on private information improve the efficiency of corporate investment. This improvement does, however, fall short of first-best efficiency. Moreover, a stronger managerial share-price concern increases the expected profit from informed trading. Hence, by encouraging individual investors to collect information about corporate decisions and trade on it, managerial myopia tends to automatically bring forth a partial solution to the problems that it causes.

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File URL: http://arrow.hunter.cuny.edu/research/papers/HunterEconWP402.pdf
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Publisher Info
Paper provided by Hunter College: Department of Economics in its series Hunter College Department of Economics Working Papers with number 402.

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Length: 32 pages
Date of creation: 2004
Date of revision: 2004
Handle: RePEc:htr:hcecon:402

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Related research
Keywords: Managerial Myopia; Corporate Investment; Informed Trading; Stock Market Incentives;

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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  1. Palley, Thomas I., 1997. "Managerial turnover and the theory of short-termism," Journal of Economic Behavior & Organization, Elsevier, vol. 32(4), pages 547-557, April. [Downloadable!] (restricted)
  2. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Stein, Jeremy C, 1988. "Takeover Threats and Managerial Myopia," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 61-80, February. [Downloadable!] (restricted)
  4. Campbell, Tim S & Marino, Anthony M, 1994. "Myopic Investment Decisions and Competitive Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 855-75, November. [Downloadable!] (restricted)
  5. Narayanan, M P, 1985. " Managerial Incentives for Short-term Results," Journal of Finance, American Finance Association, vol. 40(5), pages 1469-84, December. [Downloadable!] (restricted)
  6. Brennan, Michael J, 1990. " Latent Assets," Journal of Finance, American Finance Association, vol. 45(3), pages 709-30, July. [Downloadable!] (restricted)
  7. Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 655-69, November. [Downloadable!] (restricted)
  8. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 510-46, June. [Downloadable!] (restricted)
  9. Garvey, Gerald T & Grant, Simon & King, Stephen P, 1999. "Myopic Corporate Behaviour with Optimal Management Incentives," Journal of Industrial Economics, Blackwell Publishing, vol. 47(2), pages 231-50, June. [Downloadable!] (restricted)
  10. Simon Grant & Stephen King & Ben Polak, 1995. "Information Externalities, Share-Price Based Incentives and Managerial Behaviour," Cowles Foundation Discussion Papers 1107, Cowles Foundation, Yale University. [Downloadable!]
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  11. Bizjak, John M. & Brickley, James A. & Coles, Jeffrey L., 1993. "Stock-based incentive compensation and investment behavior," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 349-372, April. [Downloadable!] (restricted)
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