Does inefficiency of financial markets have real consequences? Or does it only result in transfers of wealth from noise traders to arbitrageurs? We study firm business investment to address this question. In our model, benevolent managers of overvalued companies invest in projects with negative...

Investors are keenly interested in financial reports of earnings because earnings provide important information for investment decisions. Thus, executives who are monitored by investors and directors face strong incentives to manage earnings. We introduce consideration of...