Information manipulation and rational investment booms and busts

Praveen Kumar; Nisan Langberg

doi:10.1016/j.jmoneco.2013.03.001

Information manipulation and rational investment booms and busts

Research output: Contribution to journal › Article › peer-review

Abstract

A model of endogenous investment booms and busts with rational agents is presented where outside investors are uncertain about both industry (aggregate) and firm-specific capital productivity, and insiders manipulate information through strategic productivity disclosures. For intermediate and high levels of agency conflict, there are aggregate investment distortions along the equilibrium path, investment dynamics are history-dependent, and depict patterns of persistent investment booms or investment busts even though investors design optimal incentive contracts based on Bayes-rational beliefs. Moreover, the aggregate uncertainty may not be resolved in the limit, as the number of firms and disclosures gets arbitrarily large.

Original language	English
Pages (from-to)	408-425
Number of pages	18
Journal	Journal of Monetary Economics
Volume	60
Issue number	4
DOIs	https://doi.org/10.1016/j.jmoneco.2013.03.001
State	Published - May 2013
Externally published	Yes

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/j.jmoneco.2013.03.001

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title = "Information manipulation and rational investment booms and busts",

abstract = "A model of endogenous investment booms and busts with rational agents is presented where outside investors are uncertain about both industry (aggregate) and firm-specific capital productivity, and insiders manipulate information through strategic productivity disclosures. For intermediate and high levels of agency conflict, there are aggregate investment distortions along the equilibrium path, investment dynamics are history-dependent, and depict patterns of persistent investment booms or investment busts even though investors design optimal incentive contracts based on Bayes-rational beliefs. Moreover, the aggregate uncertainty may not be resolved in the limit, as the number of firms and disclosures gets arbitrarily large.",

author = "Praveen Kumar and Nisan Langberg",

note = "Funding Information: We thank an anonymous referee and Esteban Rossi-Hansberg (Associate Editor) for helpful comments. We also thank Daron Acemoglu, Mark Armstrong, Ken Arrow, Salvadore Barbera, Gadi Barlevy, Ken Binmore, Philip Bond, Andres Caravajal, Michael Fishman, Michael Gallmeyer, Tom George, Itay Goldstein, Roger Guesnerie, Peter Hammond, Milton Harris, Ron Kaniel, Naftali Langberg, Marcus Miller, Dilip Mookherjee, Adriano Rampini, Lukas Schmid, K. Sivaramakrishnan, S. Viswanathan, Myrna Wooders, and seminar participants at University of Houston, Texas A&M University, the Duke-UNC Corporate Finance Conference, the Utah Winter Finance Meetings, the Washington University (St. Louis) Corporate Finance Conference, the American Finance Association Meetings, the Western Finance Association Meetings, and the Marie Curie Conference at the University of Warwick for useful comments or discussions on the issues addressed in this paper. Nisan Langberg would like to acknowledge the generous support and assistance of Tel Aviv University and financial support from the Henry Crown Institute of Business Research in Israel while on leave from the University of Houston.",

year = "2013",

month = may,

doi = "10.1016/j.jmoneco.2013.03.001",

language = "الإنجليزيّة",

volume = "60",

pages = "408--425",

journal = "Journal of Monetary Economics",

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AU - Kumar, Praveen

AU - Langberg, Nisan

N1 - Funding Information: We thank an anonymous referee and Esteban Rossi-Hansberg (Associate Editor) for helpful comments. We also thank Daron Acemoglu, Mark Armstrong, Ken Arrow, Salvadore Barbera, Gadi Barlevy, Ken Binmore, Philip Bond, Andres Caravajal, Michael Fishman, Michael Gallmeyer, Tom George, Itay Goldstein, Roger Guesnerie, Peter Hammond, Milton Harris, Ron Kaniel, Naftali Langberg, Marcus Miller, Dilip Mookherjee, Adriano Rampini, Lukas Schmid, K. Sivaramakrishnan, S. Viswanathan, Myrna Wooders, and seminar participants at University of Houston, Texas A&M University, the Duke-UNC Corporate Finance Conference, the Utah Winter Finance Meetings, the Washington University (St. Louis) Corporate Finance Conference, the American Finance Association Meetings, the Western Finance Association Meetings, and the Marie Curie Conference at the University of Warwick for useful comments or discussions on the issues addressed in this paper. Nisan Langberg would like to acknowledge the generous support and assistance of Tel Aviv University and financial support from the Henry Crown Institute of Business Research in Israel while on leave from the University of Houston.

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N2 - A model of endogenous investment booms and busts with rational agents is presented where outside investors are uncertain about both industry (aggregate) and firm-specific capital productivity, and insiders manipulate information through strategic productivity disclosures. For intermediate and high levels of agency conflict, there are aggregate investment distortions along the equilibrium path, investment dynamics are history-dependent, and depict patterns of persistent investment booms or investment busts even though investors design optimal incentive contracts based on Bayes-rational beliefs. Moreover, the aggregate uncertainty may not be resolved in the limit, as the number of firms and disclosures gets arbitrarily large.

AB - A model of endogenous investment booms and busts with rational agents is presented where outside investors are uncertain about both industry (aggregate) and firm-specific capital productivity, and insiders manipulate information through strategic productivity disclosures. For intermediate and high levels of agency conflict, there are aggregate investment distortions along the equilibrium path, investment dynamics are history-dependent, and depict patterns of persistent investment booms or investment busts even though investors design optimal incentive contracts based on Bayes-rational beliefs. Moreover, the aggregate uncertainty may not be resolved in the limit, as the number of firms and disclosures gets arbitrarily large.

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DO - 10.1016/j.jmoneco.2013.03.001

M3 - مقالة

SN - 0304-3932

VL - 60

SP - 408

EP - 425

JO - Journal of Monetary Economics

JF - Journal of Monetary Economics

IS - 4

ER -

Information manipulation and rational investment booms and busts

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