Do Short-Term Managerial Objectives Lead to Under- or Over-Investment in Long-Term Projects

Journal of Finance, Vol. 48, pp. 719-729 (1993)

Harvard Law School John M. Olin Center Discussion Paper No. 87

16 Pages Posted: 5 Dec 2018

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER)

Lars Stole

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 1993

Abstract

This paper studies managerial decisions about investment in long-run projects in the presence of imperfect information (the market knows less about such investments than the firm's managers) and short-term managerial objectives (the managers are concerned about the short-term stock price as well as the long-term stock price). Prior work has suggested that imperfect information and short-term managerial objectives induce managers to underinvest in long-run projects. We show that either underinvestment or overinvestment is possible, and we identify the connection between the type of informational imperfection present and the direction of the distortion. When investors cannot observe the level of investment in long-run projects, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, an excessive level of investment will be induced.

Keywords: Corporate governance, short-termism, myopia, long-term investments

Suggested Citation

Bebchuk, Lucian A. and Stole, Lars A., Do Short-Term Managerial Objectives Lead to Under- or Over-Investment in Long-Term Projects (June 1993). Journal of Finance, Vol. 48, pp. 719-729 (1993). Available at SSRN: https://ssrn.com/abstract=3293319

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

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Lars A. Stole

University of Chicago - Booth School of Business ( email )

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