Managerial Career Concerns and Investments in Information

Authors

Todd T. Milbourn, Southern Methodist University (SMU) - SMU Cox School of BusinessFollow
Anjan V. Thakor, Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial EngineeringFollow
Richard L. Shockley, Indiana University - Kelley School of Business - Department of FinanceFollow

Publication Date

5-23-2001

Abstract

We extend the "implicit incentives" literature by analyzing how career concerns impact a risk-neutral manager's decision of how much to learn about a project before investing in it. The manager has unknown ability that determines the probability with which a good project is available, so the market updates ability assessments from project outcomes. While project choice is efficient in equilibrium, an unobservable investment in the precision of project evaluation allows the manager to control the probabilities of future reputational states. This distorts his investment in precision above first best when project payoffs can be observed only on accepted projects.

Document Type

Article

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English