This paper tests two theories of corporate investment myopia which predict a distortion in investment policy with respect to the standard net present value rule. The theories are confronted with the empirical evidence, allowing the theories to compete to explain investment behavior. Research and development expense is used to proxy for long-term investment in a pooled, cross-sectional time-series regression. I find that research and development expense is decreasing in the age of the Chief Executive Officer. Results are consistent with the hypothesis that agency costs are lower when the firm invests myopically, rather than follow a standard net present value rule.

We examine the change in the value of the underlying stock associated with long-term option introduction. Analysis of the abnormal returns associated with LEAPS (Long-Term Equity Anticipation Security) introductions indicates a decline in firm value even after we control for the endogenous nature of the listing decision. However, the evidence does not support previously-offered explanations for the price change associated with option introductions. In particular, we do not find the predicted relations between the cumulative abnormal returns and variables associated with loosening of short sale constraints such as beta, proxies for the dispersion in investor beliefs, and change in relative short interest.

Dividend reductions have long been considered a “last resort” action for firm managers. Managerial reluctance to reduce dividends emanates from the view that dividend drops signal managerial pessimism regarding future earnings. Contrary to expectations, studies show that earnings rebound significantly following a dividend reduction; yet investors react negatively to the dividend-drop announcement. We present an explanation for the anomalous behavior of earnings and returns around the time of a dividend drop. Our evidence suggests that a reduction in a firm's established dividend coincides with a decrease in the value of the firm's real options. Earnings rebound following the dividend reduction due to the savings that result as the firm allows growth options to expire; however, announcement period returns suggest that investors recognize the lost value associated with the forthcoming expiration of growth options.