When Managers Cover Their Posteriors: Making the Decisions the Market Wants to See

The stock market has opinions as to what choices firms should make. We show that concern for current share prices may lead managers to make these choices rather than those suggested by their own superior information. Even when arbitrarily many privately informed firms have to make a similar decision, the market's "prejudices" may still prevail. We compare the distortions that arise from share-price maximization with those due to herd behavior among profit-maximizing firms, and show that the former results in strictly less efficient use of information.

[1]  J. Campbell,et al.  The New Palgrave Dictionary of Money and Finance , 1994 .

[2]  I. Welch.  Sequential Sales, Learning, and Cascades , 1992 .

[3]  J. Paul.  On the Efficiency of Stock-Based Compensation , 1992 .

[4]  D. Hirshleifer.  Managerial Reputation and Corporate Investment Decisions , 1993 .

[5]  Jeffrey Zwiebel,et al.  Corporate Conservatism and Relative Compensation , 1995, Journal of Political Economy.

[6]  Lars Stole,et al.  Do Short‐Term Objectives Lead to Under‐ or Overinvestment in Long‐Term Projects? , 1993 .

[7]  James A. Brickley,et al.  Stock-based incentive compensation and investment behavior , 1993 .

[8]  Michael T. Jacobs,et al.  Short-Term America: The Causes and Cures of Our Business Myopia , 1991 .

[9]  Jeremy C. Stein,et al.  Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior , 1989 .

[10]  D. Scharfstein,et al.  Herd Behavior and Investment , 1990 .

[11]  Tarun Chordia,et al.  Resolution Preference and Project Choice , 1990 .

[12]  A. Banerjee,et al.  A Simple Model of Herd Behavior , 1992 .

[13]  Financial Intermediation with Proprietary Information , 1992 .

[14]  Jeremy I. Bulow,et al.  Rational Frenzies and Crashes , 1991, Journal of Political Economy.

[15]  Stephen P. King,et al.  INFORMATION EXTERNALITIES, SHARE‐PRICE BASED INCENTIVES AND MANAGERIAL BEHAVIOUR , 1996 .

[16]  Brett Trueman.  The Relationship between the Level of Capital Expenditures and Firm Value , 1986, Journal of Financial and Quantitative Analysis.

[17]  A. Bhide.  The hidden costs of stock market liquidity , 1993 .

[18]  M. P. Narayanan,et al.  Managerial Incentives for Short-term Results , 1985 .

[19]  S. Bikhchandani,et al.  You have printed the following article : A Theory of Fads , Fashion , Custom , and Cultural Change as Informational Cascades , 2007 .

[20]  G. Stalk,et al.  Kaisha: The Japanese Corporation. , 1986 .

[21]  J. Geanakoplos,et al.  Psychological games and sequential rationality , 1989 .

[22]  Yongmin Chen.  Conflicting interests in information disclosure and short-term orientation of firms , 1994 .

[23]  Brett Trueman.  Analyst Forecasts and Herding Behavior , 1994 .