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Information, Investment Horizon, and Price Reactions

  • Anjan V. Thakor

    (Washington University in St. Louis)

This paper studies the dynamic investment policies of firms under asymmetric information. Managers make decisions to maximize the wealth of existing shareholders. In equilibrium, the superior firms invest 'myopically', choosing intrinsically lower-valued projects that produce 'early' cash flows. The inferior firms follow the socially preferred rule of investing in intrinsically higher-valued projects that product 'late' cash flows. In addition to explaining investment myopia, the model generates numerous predictions regarding announcement effects of equity issues and attempts by firms to stockpile cash, firms' preferences for limits on mandatory disclosure rules, and the effects of managerial entrenchment motives.

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File URL: http://econwpa.repec.org/eps/fin/papers/0411/0411029.pdf
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Paper provided by EconWPA in its series Finance with number 0411029.

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Length: 25 pages
Date of creation: 11 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0411029
Note: Type of Document - pdf; pages: 25
Contact details of provider: Web page: http://econwpa.repec.org

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