Resolution Preference and Project Choice

A manager who is concerned with outsider’s perceptions of himself or his firm will be sensitive to the timing of resolution of uncertainty about the firm’s projects. While a high ability manger tries to advance resolution of a likely-favorable outcome, a low manager may defer resolution, hoping to be mistaken for a high ability manager forced into late resolution by external circumstances. This suggests that managers who demand protection from takeovers to focus on long-term goals are frequently incompetent. In contrast with previous models, we show that resolution preference can cause a bias toward late cash flows (“hyperopia”) as well as early cash flows (“myopia”). A high ability manager may accelerate resolution through R&D, even if this reduces net present value. Nevertheless, since early resolution is preferred by high quality mangers or firms, higher R&D can be good news for investors. Thus, reputational concerns will sometimes cause excessive innovative expenditures. Resolution-advancing decisions are more favored when they are visible to outsiders. The model provides some new empirical predictions, and offers an explanation for some evidence that is inconsistent with previous models of managerial time horizons. It also suggests that in general there may be a bias toward direct product development over basic research activity. Perhaps more importantly, there is a perverse sorting of high ability managers to conventional