Ambiguity and the Corporation: Group Disagreement and Underinvestment

42 Pages Posted: 17 Oct 2014 Last revised: 25 Sep 2017

See all articles by Lorenzo Garlappi

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Ron Giammarino

University of British Columbia (UBC) - Sauder School of Business

Ali Lazrak

University of British Columbia (UBC) - Sauder School of Business

Date Written: September 24, 2017

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, onfirms' outcomes and, more generally, on the difference between group and individual behavior

Keywords: ambiguity, group decisions, dynamic consistency, dynamic real investment, security issuance.

JEL Classification: G3, D7,G31

Suggested Citation

Garlappi, Lorenzo and Giammarino, Ronald and Lazrak, Ali, Ambiguity and the Corporation: Group Disagreement and Underinvestment (September 24, 2017). Available at SSRN: https://ssrn.com/abstract=2510235 or http://dx.doi.org/10.2139/ssrn.2510235

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Ronald Giammarino (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver BC V6T 1Z2
Canada
604-822-8357 (Phone)
604-822-4695 (Fax)

Ali Lazrak

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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