Short- and Long-Term Inefficiencies: Transparency vs. Opacity

We study how managerial myopia affects project choice when short- and long-term projects differ not only in payoff timing but also in the timing of public information revelation. In our model, a privately informed manager
chooses between a transparent short-term project, whose value is observed by investors immediately, and an opaque long-term project, whose value is revealed to investors only in the long run. Because the long-term project is priced in the short run based on investors’ conditional expectation rather than on its realized value, its opacity may be attractive even when its fundamental value is lower. Thus, two types of inefficiencies arise in equilibrium: inefficient selection of short-term projects and inefficient selection of opaque long-term projects. We show that the latter inefficiency can dominate, implying that myopia may increase opaque long-term investment while lowering its average quality.

Homepage: https://bschool-en.huji.ac.il/people/elyashiv-wiedman