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Renegotiation, Investment Horizons, and Managerial Discretion

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  • Noe, Thomas H
  • Rebello, Michael J

Abstract

In this article, the authors show that the evolution of managerial entrenchment can distort investment horizons. Both myopic and hypermetropic distortions can arise. The direction of these distortions is determined by the locus of control and their pervasiveness by the degree of management entrenchment. Myopic distortions occur when shareholders directly determine investment policy. Hypermetropic distortions occur when management sets investment policy. The inherent hypermetropic bias of managers is mitigated by front-loaded compensation packages and pension plans tied to short-run performance. These distortions in investment horizons may have implications for the allocation of corporate control. Copyright 1997 by University of Chicago Press.

Suggested Citation

  • Noe, Thomas H & Rebello, Michael J, 1997. "Renegotiation, Investment Horizons, and Managerial Discretion," The Journal of Business, University of Chicago Press, vol. 70(3), pages 385-407, July.
    • Handle: RePEc:ucp:jnlbus:v:70:y:1997:i:3:p:385-407
    DOI: 10.1086/209723
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    Cited by:

    1. Lu, Zheng & Liang, Yanzi & Hu, Yanglin & Liu, Yang, 2024. "Is managerial myopia detrimental to corporate ESG performance?," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 998-1015.
    2. Gaspar, Jose-Miguel & Massa, Massimo & Matos, Pedro, 2005. "Shareholder investment horizons and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 76(1), pages 135-165, April.
    3. Holden, Craig W. & Lundstrum, Leonard L., 2009. "Costly trade, managerial myopia, and long-term investment," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 126-135, January.
    4. Axel R. Helling & Benjamin Maury & Eva Liljeblom, 2020. "Exit as governance: do blockholders affect corporate innovation in large US firms?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1703-1725, June.
    5. George Christodoulakis & Konstantinos Stathopoulos & Nikolaos Tessaromatis, 2012. "The term structure of loss preferences and rationality in analyst earnings forecasts," Journal of Asset Management, Palgrave Macmillan, vol. 13(5), pages 310-326, October.
    6. Lundstrum, Leonard L., 2002. "Corporate investment myopia: a horserace of the theories," Journal of Corporate Finance, Elsevier, vol. 8(4), pages 353-371, October.
    7. Nobuyuki Isagawa, 2006. "Cross-Shareholding and Unwinding of Cross-Shareholding Under Managerial Entrenchment," Discussion Papers 2006-02, Kobe University, Graduate School of Business Administration.

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