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

17 Pages Posted: 5 Jan 2007 Last revised: 7 Jan 2007

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); 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: May 1994

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.

Suggested Citation

Bebchuk, Lucian A. and Stole, Lars A., Do Short-Term Managerial Objectives Lead to Under- or Over-Investment in Long-Term Projects (May 1994). NBER Working Paper No. t0098, Available at SSRN: https://ssrn.com/abstract=579776

Lucian A. Bebchuk (Contact Author)

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Lars A. Stole

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