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Information, Investment Horizon, and Price Reactions

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  • Thakor, Anjan V.

Abstract

This paper studies the dynamic investment policies of firms under asymmetric information.Managers make decisions to maximize the wealth of existing shareholders. In equilibrium, the superior firms invest “myopically”, choosing intrinsically lower-valued projects that produce “early” cash flows. The inferior firms follow the socially preferred rule of investing in intrinsically higher-valued projects that produce “late” cash flows. In addition to explaining investment myopia, the model generates numerous predictions regarding announcement effects of equity issues and attempts by firms to stockpile cash, firms' preferences for limits on mandatory disclosure rules, and the effects of managerial entrenchment motives.

Suggested Citation

  • Thakor, Anjan V., 1993. "Information, Investment Horizon, and Price Reactions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 459-482, December.
    • Handle: RePEc:cup:jfinqa:v:28:y:1993:i:04:p:459-482_00
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    Cited by:

    1. Jun Lu & Wei Wang, 2015. "Board independence and corporate investments," Review of Financial Economics, John Wiley & Sons, vol. 24(1), pages 52-64, January.
    2. Prezas, Alexandros P., 2009. "Internal capital markets, empire building, and capital structure," Journal of Economics and Business, Elsevier, vol. 61(3), pages 173-188.
    3. Lu, Jun & Wang, Wei, 2015. "Board independence and corporate investments," Review of Financial Economics, Elsevier, vol. 24(C), pages 52-64.
    4. Jonathan Carmel, 2008. "But Is It Myopia? Risk Aversion and the Efficiency of Stock‐Based Managerial Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(2), pages 541-579, June.
    5. Grant, Simon & King, Stephen & Polak, Ben, 1996. "Information Externalities, Share-Price Based Incentives and Managerial Behaviour," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 1-21, March.
    6. Jonathan Seaton & Ian Walker, 1997. "Signalling, Disclosure And The Implications Of Financial Structure For Uk Corporate R&D," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 5(1), pages 75-90.
    7. Mehdi Nehkili & Evelyne Poincelot, 2000. "La fonction R&D et la latitude managériale: une analyse théorique," Revue Finance Contrôle Stratégie, revues.org, vol. 3(1), pages 5-28, March.
    8. Boyle, Glenn & Guthrie, Graeme, 2006. "Payback Without Apology," Working Paper Series 18957, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    9. Glenn Boyle & Graeme Guthrie, 2006. "Payback without apology," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(1), pages 1-10, March.
    10. repec:vuw:vuwscr:18957 is not listed on IDEAS
    11. Chemmanur, Thomas J. & Ravid, S. Abraham, 1999. "Asymmetric Information, Corporate Myopia, and Capital Gains Tax Rates: An Analysis of Policy Prescriptions," Journal of Financial Intermediation, Elsevier, vol. 8(3), pages 205-231, July.

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