Abstract
This paper studies the effect of corporate investors with short investment horizons on Board business model choice; the price of key inputs under general equilibrium; and CEO incentives. When investors have imperfect information as to the skills of the firm, business model choice sends a signal. Pooling on business models which will only succeed for the best management raises short run equity values. This pooling effect leads to the mis-allocation of too many firms to risky technologies, an increase in the cost of equity capital, and a bubble in the price of key inputs which is pushed above fundamentals. The business-model distortion effect grows with the elasticity of input supply. A market signal as to the true ability of management can both increase and reduce the distortion. CEO incentives are robustly biased towards short-run bonuses, and weaken incentives for effort on any actions not immediately priced by the market.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
