Do Short-Term Managerial Objectives Lead to Under- or Over-Investment in Long-Term Projects / Lucian Arye Bebchuk, Lars A. Stole.

Format:

Book

Author/Creator:

Bebchuk, Lucian Arye.

Contributor:

National Bureau of Economic Research.

Stole, Lars A.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0098.

NBER technical working paper series no. t0098

Language:

English

Subjects (All):

Investments--Mathematical models.

Investments.

Corporations--Decision making.

Corporations.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Cambridge, MA : National Bureau of Economic Research, 1994.

Summary:

This paper studies managerial decisions about investment in long-run projects in the presence of imperfect information (the market knows less about such investments than the firm's managers) and short-term managerial objectives (the managers are concerned about the short-term stock price as well as the long-term stock price). Prior work has suggested that imperfect information and short-term managerial objectives induce managers to underinvest in long-run projects. We show that either underinvestment or overinvestment is possible, and we identify the connection between the type of informational imperfection present and the direction of the distortion. When investors cannot observe the level of investment in long-run projects, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, an excessive level of investment will be induced.

Notes:

Print version record

May 1994.