Institutional investors and myopic corporate investment.

This dissertation analyzes the interplay among managerial incentives, institutional investors, and corporate investment in the presence of efficient capital markets. In my model the fund manager is better informed than the market but has less information than the corporate manager. In this context there is the potential for manipulation of the market by both the fund manager and the corporate manager. The incentives to manipulate the market and the form of equilibrium depend on how heavily the compensation schemes of the corporate and fund managers emphasize future performance relative to current performance. Under some conditions manipulation of the market by the fund manager can subvert the incentives of the corporate manager to make optimal investment decisions. That is, the presence and trading behavior of the institutional investor can lead to investment distortions in equilibrium. For an optimal investment equilibrium to exist, two conditions must be satisfied. First, the compensation scheme of the corporate manager must be sufficiently sensitive to long-term performance. Second, the compensation scheme of the fund manager must emphasize long-term performance both in absolute terms and relative to the compensation of the corporate manager. If this second requirement is not met, the trading behavior of the institutional investor can undermine the incentives of the manager of the firm to pursue the optimal investment strategy. Even so, one should not immediately conclude that myopic investment behavior is due to an improperly configured compensation scheme of the fund manager. Such myopia could just as well be solely a result of the characteristics of the compensation scheme of the corporate manager. Forces that prevent the use of the compensation plan to address this investment problem could include other incentive problems arising from moral hazard or