DO SHORT-TERM OBJECTIVES LEAD TO UNDERINVESTMENT OR OVERINVESTMENT IN LONG-TERM PROJECTS

We examine managerial investment decisions in the presence of imperfect information and short-term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long-run projects. We show that short-term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long-run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.