Ilan Kremer, Short-termism, Project Choice, and Strategic Disclosure 

 

Abstract:

 

We develop a model in which a manager selects between a short-term and a long-term project. The model is based on strategic disclosure. The short-term cash flow can be disclosed early but can also be hidden temporarily. If, instead, the manager selects the long-term project, there are no verifiable results for him to disclose in the short run.  The stock price reflects a suspicion that this manager is hiding a negative outcome of a short-term project. Consistent with the existing literature, we find that strategic disclosure may lead to inefficiency in the project choice, with the manager selecting a short-term inferior project. However, our main result is that the inefficiency is quite limited even in the extreme case where the manager cares mostly about the short-term stock price.

 

 

Elath Hall, 2nd floor, Feldman Building, Edmond Safra Campus

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