myopia Flashcards
what is the most common way to model managerial myopia?
hyperbolic discounting
what did Hirshliefer contribute to research on managerial myopia?
paper on managerial reputation and corporate finance decisions
mentioned managers make short term decisions, affecting their long term reputations
projects with short term resolutions taken by good mgrs to separate from bad mgrs with long term delaying strategies
biases: visibility bias (improving what is immediately visible) and resolution preference (similar to uncertainty avoidance, wanting to know project outcome sooner)
what did Kang et al find on managerial myopia?
attempt to offset myopia through overconfidence, comparing privately owned firms with publicly owned.
find that overconfidence can offset myopia, but unbiased profits always higher when there is 0 overconfidence and myopia - so problem not entirely resolved
what did Fairchild find on managerial overconfidence and dividend policy?
sorted confusion in existing research about whether overconfidence positively or negatively related to dividends:
where dividends and overconfidence are positively related:
if you commit to high dividends, you have to make the cashflows, so signals to market you have high earnings expectations. managers confident about projects in place and creation of cash flows may go for high dividends to push up share price and signal to market.
i.e. - short term!
where dividends and overconfidence are negatively related:
if overconfidence about future projects exists, may keep dividends low to save cash flows and invest at later date.
i.e. - long term!
adding myopia in - myopic investors and dividend catering: short-termism of market might drive dividend increases because of catering.
what is dividend catering?
Baker and Wurgler (2004)’s catering theory states that companies satisfy investors’ demands by paying dividends when investors place a higher premium stock price on companies that pay dividends, compared to companies that do not pay, and vice versa.
where is there a lack of research on managerial myopia?
myopia and m&a. we know OC leads to value-destroying M&A, what happens if you add myopia in?
what did Jensen’s dangers of overvalued equity contribute to managerial myopia?
myopic capital markets/investors.
overvalued equity — mgerial marijuana. short term drug - excitement/reputation. taking short-run actions to keep price high
long-term destructive - can’t maintain it and truth will out, especially if not investing in projects to keep share prices high.
what is managerial myopia?
The term myopia refers in management literature to the cognitive shortcomings that managers systematically display (Levinthal & March, 1993). Tends to lead to underinvestment problems!
how is hyperbolic discounting modelled?
NPV equation updated to include hyperbolic discount parameter (notation is phi) - multiplied by everything except the initial investment.
if phi 0 - competely myopic (myopic decision maker)
all you see is the -I, so you never want to take projects.
if phi 1 - proper exponential discounting (farsighted/rational decision maker)
does myopia lead to over or underinvestment?
generally, underinvestment, however could have situations where myopia means you take the project, e.g. if investment is very quickly paid off but overall cashflows start to become negative in future, meaning overall NPV negative. so myopia doesn’t always mean you turn it down.
are decision makers aware they discount hyperbolically?
decision makers understand that they’re doing this, they just can’t change it. they know that if they delay the bad, next period where they have to choose what to do, they will choose to delay it again and it’ll never get done. they know they will be myopic.
