We develop a model of corporate myopia in which the interaction between asymmetric information and short-term trading by equity holders induces firms to undertake short-term rather than long-term projects, which are intrinsically more valuable. We study the effectiveness of alternative policy prescriptions in eliminating myopia. We show that a capital gains tax cut for long-term equity holders induces optimal project selection; an across-the-board tax cut has no such impact. We characterize the long-term capital gains tax rate which eliminates corporate myopia. Further, we show that a long-term capital gains tax cut does not induce a bias toward inefficient long-term projects when it is, in fact, short-term projects which are more valuable. In contrast, an investment tax credit directed at long-term projects leads to such a bias. Finally, we show that reducing the long-term capital gains tax rate to the level required to eliminate myopic investment behavior may also lead to an increase in government tax revenues.Journal of Economic Literature Classification Numbers: H21, G31, D82.

Prior to the announcement of a tender offer, the bidding firm is legally allowed to acquire shares in the open market, subject to some limitations. These pre-announcement purchases are known as toeholds. This paper presents a simple model that describes the bidder's optimal toehold acquisition strategy, within an environment that closely parallels the present legal institutions. The model shows that toeholds and bids interact in a complex manner even without the presence of asymmetric information. By examining a simple environment the paper provides a useful alternative hypothesis for tests of other, presumably more complex, models. One of the main implications of our model is that if no competing bidders are expected, no toeholds should be purchased. The paper also demonstrates that the correct specification of an empirical model can be critical. For example, under some parameter values toehold purchases may exhibit a negative cross-sectional correlation with the pre-announcement run up in the stock price. This occurs even though prices are strictly increasing the size of the toehold. Several implications concerning various aspects of merger legislation are considered. For example, we demonstrate that a rule similar to a “fair price” provision has the desirable property that a second bidder arrives and wins if and only if he places a higher value on the target than the initial bidder.