Do Short-Term Managerial Objectives Lead to Under- or Over-Investment in Long-Term Projects

Lucian Bebchuk () and Lars Stole

No 98, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

Date: 1994-05
Note: ME
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Citations: View citations in EconPapers (6)

Published as Journal of Finance, vol 48, no 2, pp 719-729 (1993)

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