Abstract

We incorporate managers’ time-inconsistent preferences into the DeMarzo et al. (2012) model of dynamic agency and the q theory of investment. Our model provides an alternative explanation for underinvestment from the perspective of managers’ time inconsistency. It also shows that firms prefer delaying a cash payout due to managers’ time-inconsistent preferences, and the corresponding distorted investment and payout decisions significantly decrease a firm’s average q and marginal q.

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