Firm and Managerial Incentives to Manipulate the Timing of Project Resolution
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
Emory University - Department of Finance
Sonya S. Lim
DePaul University - Department of Finance
March 21, 2001
Dice Center Working Paper No. 2001-4
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, D82working papers series
Date posted: April 25, 2001
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