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Do Short-Term Objectives Lead to Under- or Overinvestment in Long-Term Projects?
Abstract
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.
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Entrenchment can also produce beneficial effects by reducing the extent to which the threat of a takeover distorts investments in long-term projects or by enabling managers to extract higher acquisition premia in negotiated transactions.
“To be sure, entrenchment can also produce beneficial effects by reducing the extent to which the threat of a takeover distorts investments in long-term projects [Stein (1988) and Bebchuk and Stole (1993)] or by enabling managers to extract higher acquisition premia in negotiated transactions [Stulz (1988)].”
From What Matters in Corporate Governance? (2009) · cites this paper as Bebchuk and Stole (1993)
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References 14 · Cited by 418
Metadata
- Authors
- Bebchuk, L. A., & Stole, L. A.
- Affiliations
- National Bureau of Economic Research (US)
- ORCID
- Stole, Lars A.
- Venue
- The Journal of Finance
- Publisher
- JSTOR
- Published
- 1993-06
- Volume
- 48
- Issue
- 2
- Pages
- 719
- ISSN
- 0022-1082 (ISSN-L)
- OpenAlex
- W2034372432
- Cited by
- 418
- References
- 14
- Citations by year
- 2026: 5 · 2025: 14 · 2024: 18 · 2023: 24 · 2022: 30 · 2021: 21 · 2020: 23 · 2019: 19 · 2018: 27 · 2017: 24 · 2016: 18 · 2015: 22 · 2014: 14 · 2013: 24 · 2012: 18
- FWCI
- 15.94
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- The Journal of Finance (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
- Social Sciences › Economics, Econometrics and Finance › Finance › Capital Investment and Risk Analysis
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Keywords
- short-term objectives, managerial investment decisions, underinvestment, overinvestment, long-term projects, imperfect information, agency theory, investment distortion, information asymmetry, investment productivity
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