Career Concerns, Investment, and Management Forecasts

Topic:

Career Concerns, Investment, and Management Forecasts

Time&Date: 

  10:00-11:15 am, 2019/9/27 (Friday)

Venue:

  Room 619, Teaching A

Speaker:

 Prof. Jing Li (The University of Hong Kong)

A manager invests capital in a project with private information about the project’s profitability. He also has private knowledge of his ability that produces a cash flow independent of the project’s cash flow. The manager is concerned about both the market valuation of the firm and the market assessment of his ability which affects his future career prospects. The former (latter) concerns create a signaling incentive to overinvest (underinvest). Higher-quality earnings in the presence of an overinvestment (underinvestment) improve (diminish) efficiencies. When the manager issues an earnings forecast, he uses the forecast as a signaling device for a favorable market valuation of the firm and distorts investment to signal his ability. These signaling incentives translate into an upwardly biased forecast and an underinvestment. When career concerns exceed a threshold, the manager is ex ante better off by committing not to forecast earnings. Novel empirical predictions emerge from the comparative statics.