Investment and Managerial Preferences

We develop a theoretical model of managerial myopia based on the Q theory of investment. In this model, the manager chooses both investment quantity and the investment horizon. The manager may be myopic, causing an excess weight to be placed by the manager on short term profits, relative to firm-value maximizing behavior. In such a case, investments may be expected to be of a shorter time horizon, even if there are advantages to longer term investing. Our model yields a new important testable implication. The sensitivity of investment to growth opportunities is lower for myopic managers.