Abstract
In this paper, we demonstrate that informational asymmetries within a firm along with managerial labor market concerns can jointly result in investment myopia being equilibrium behavior. In contrast to earlier studies (like that of Shleifer and Vishny [1989]), we find that in the presence of bothreputation and entrenchment incentives, managers invest in long-term projects for reputation building and short-term projects to entrench themselves. Further, we establish conditions under which delegating project selection is optimal, even though it requires that the owner tolerate short-term project selection. Finally, we present several empirical implications of our analysis.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 565-585 |
| Number of pages | 21 |
| Journal | Journal of Accounting, Auditing & Finance |
| Volume | 10 |
| Issue number | 3 |
| DOIs | |
| State | Published - Jul 1995 |
Funding
We wish to acknowledge helpful comments from Bill Baber, Stan Bai man, Harry Evans, Yuhchang Hwang, John O'Brien, Bharat Sarath, Shyam Sunder, an anonymous referee and participants at the Third Conference on Financial Economics and Accounting at New York University. The first author acknowledges research support from the Katz Graduate School of Business, the second author acknowledges support from the KPMG Peat Marwick Research Fellowship and the last author acknowledges support from the Accounting Research Center at Northwestern University.
ASJC Scopus subject areas
- Accounting
- Finance
- Economics, Econometrics and Finance (miscellaneous)