Renegotiation, investment horizons, and managerial discretion

In this article, we 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 have implications for the allocation of corporate control.