Do Short‐Term Objectives Lead to Under‐or Overinvestment in Long‐Term Projects?

Do Short‐Term Objectives Lead to Under‐or Overinvestment in Long‐Term Projects? ABSTRACT We examine managerial investment decisions in the presence of imperfect information and short‐term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long‐run projects. We show that short‐term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long‐run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Do Short‐Term Objectives Lead to Under‐or Overinvestment in Long‐Term Projects?

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
1993 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1993.tb04735.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT We examine managerial investment decisions in the presence of imperfect information and short‐term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long‐run projects. We show that short‐term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long‐run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.

Journal

The Journal of FinanceWiley

Published: Jun 1, 1993

References

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