Firm and Managerial Incentives to Manipulate the Timing of Project Resolution

Dice Center Working Paper No. 2001-4

40 Pages Posted: 25 Apr 2001

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Tarun Chordia

Emory University - Department of Finance

Sonya S. Lim

DePaul University - Department of Finance

Date Written: March 21, 2001

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.

JEL Classification: G3, G31, G30, O31, M21, D21, L21, D23, D82

Suggested Citation

Hirshleifer, David A. and Chordia, Tarun and Lim, Sonya S., Firm and Managerial Incentives to Manipulate the Timing of Project Resolution (March 21, 2001). Dice Center Working Paper No. 2001-4. Available at SSRN: https://ssrn.com/abstract=265753 or http://dx.doi.org/10.2139/ssrn.265753

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

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