The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Do Short‐Term Objectives Lead to Under‐ or Overinvestment in Long‐Term Projects?
Published: 06/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04735.x
LUCIAN ARYE BEBCHUK, LARS A. STOLE
We examine managerial investment decisions in the presence of imperfect information and short‐term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long‐run projects. We show that short‐term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long‐run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.