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Firm and Managerial Incentives to Manipulate the Timing of Project ResolutionDavid A. HirshleiferUniversity of California, Irvine - Paul Merage School of Business Tarun ChordiaEmory University - Department of Finance Sonya S. LimDePaul University - Department of Finance March 21, 2001 Dice Center Working Paper No. 2001-4 Abstract: A manager who wants to be viewed favorably has an incentive to advance or delay the arrival of information about his firm's profitability. In the model, a high ability manager tries to advance resolution of a likely-favorable outcome, while a low ability manager may defer resolution. Such manipulation of information arrival causes greater investment in execution projects (which tend to resolve early) than exploratory projects (which tend to resolve late), and affects investment in hastening or retarding project resolution. In contrast with previous literature, in some cases managers may secretly overinvest. The model offers empirical implications about innovative versus conventional investments, associated stock price reactions, and corporate control. The theory also implies a perverse sorting of high ability managers to conventional activities and low ability managers to visionary enterprises.
Number of Pages in PDF File: 40 JEL Classification: G3, G31, G30, O31, M21, D21, L21, D23, D82 working papers seriesDate posted: April 25, 2001Suggested CitationContact Information
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