Conditions for Rational Investment Short-Termism

In this paper we examine the theoretical conditions under which a firm will have incentives to optimallychoose investment projects of duration that deviates from its stated horizon objective. Our approachconsiders a context in which investment horizon is subject to randomness and its length is optimally chosenby each firm’s manager so that to maximize his/her objective function in the form of expected wage. Ourframework derives the distribution of optimal horizon choices for which all managers would obtain thesame level of expected wage. It is shown that the presence of asymmetric loss preferences in the form ofhigher costs from managers’ investment duration over-statements (under-statements), results in a shift ofthe distribution of optimal durations to the left (right), thus making investment short-termism (longtermism)more likely to appear....