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Ambiguity and the corporation: Group disagreement and underinvestment

Lorenzo Garlappi, Ron Giammarino and Ali Lazrak

Journal of Financial Economics, 2017, vol. 125, issue 3, 417-433

Abstract: We study a dynamic corporate investment problem where decisions have to be made collectively by a group of agents holding heterogeneous beliefs and adhering to a “utilitarian” governance mechanism in which each agent has a given influence in the decision. In this setting we show that: (i) group decisions are typically dynamically inconsistent, (ii) dynamic inconsistency leads to inefficient underinvestment, and (iii) the ability to trade securities among insiders or with outsiders may restore efficient investment decisions but it may, in some cases, lead to inefficient overinvestment. Our theory can help explain the empirical evidence on the effect of diversity of groups, such as corporate boards, on firms’ outcomes and, more generally, on the difference between group and individual behavior.

Keywords: Ambiguity; Group decisions; Dynamic consistency; Dynamic real investment; Security issuance (search for similar items in EconPapers)
JEL-codes: G30 G32 D25 D70 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jfineco.2017.06.005

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