Ambiguity and the corporation: Group disagreement and underinvestment

Lorenzo Garlappi, Ron Giammarino and Ali Lazrak

Journal of Financial Economics, 2017, vol. 125, issue 3, 417-433

Abstract: We study a dynamic corporate investment problem where decisions have to be made collectively by a group of agents holding heterogeneous beliefs and adhering to a “utilitarian” governance mechanism in which each agent has a given influence in the decision. In this setting we show that: (i) group decisions are typically dynamically inconsistent, (ii) dynamic inconsistency leads to inefficient underinvestment, and (iii) the ability to trade securities among insiders or with outsiders may restore efficient investment decisions but it may, in some cases, lead to inefficient overinvestment. Our theory can help explain the empirical evidence on the effect of diversity of groups, such as corporate boards, on firms’ outcomes and, more generally, on the difference between group and individual behavior.

Keywords: Ambiguity; Group decisions; Dynamic consistency; Dynamic real investment; Security issuance (search for similar items in EconPapers)
JEL-codes: D25 D70 G30 G32 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X17301228
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:125:y:2017:i:3:p:417-433

DOI: 10.1016/j.jfineco.2017.06.005

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().