TAILIEUCHUNG - But Is It Myopia? Risk Aversion and the Efficiency of Stock-Based Managerial Incentives

Controlling for the pre-game expected outcome, we are able to reject the hypothesis that the loss effect after soccer games is driven by economic factors such as reduced productivity or lost revenues. We also document that the effect is stronger in small stocks, which other studies find are disproportionately held by local investors and more strongly affected by sentiment. Overall, our interpretation of the evidence is that the loss effect is caused by a change in investor mood. | But Is it Myopia Risk Aversion and the Efficiency of Stock-Based Managerial Incentives Jonathan Carmel Ross School of Business University of Michigan 701 Tappan Ann Arbor MI 48109-1234 and The Interdisciplinary Center Herzlia jpcarmel@ This paper points out that stock incentives do not lead to myopia unless they result in more emphasis on the short-term than would occur under an optimal contract. It shows that myopia findings relative to the standard used throughout the literature first-best efficiency are often reversed when evaluated relative to the relevant standard of optimal contracting. Results reported by the previous literature to be myopia often in fact have excessive emphasis on the long-term. The paper solves in closed-form for the region in parameter space which gives rise to these reversals and shows that it can be arbitrarily large. 1. Introduction Although there has been much important work on corporate myopia 1 the papers in this area share two related features whose importance has been overlooked by the literature i Managers are assumed to be risk neutral. ii Myopia is evaluated relative to a first-best standard. Although the current paper does develop a new model of myopia this is not the paper s primary contribution. Instead the paper s primary contribution is to show that myopia findings relative to a first-best standard that ignore risk aversion are often reversed when evaluated relative This paper is an extension of the unpublished working paper Managerial Myopia and the Observability of Future Cash Flows and contains its results. I thank Yaacov Bergman Eli Berkovitch Aaron Edlin Ronen Israel . Narayanan and especially Jaime Zender for their many helpful comments. All errors of course remain my own. 1. Narayanan 1985 Stein 1988 1989 Thakor 1990 Bebchuk and Stole 1993 Bizjak Brickley and Coles 1993 Thakor 1993 and Narayanan 1996 are some important examples. 2008 The Author s Journal Compilation 2008 Blackwell Publishing Journal of .

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