Corporate Finance.

• Position: Bureau News

The NBER's Program on Corporate Finance met in Cambridge on November 16. Program Director Raghuram Rajan, NBER and University of Chicago, chose these papers for discussion:

Michael C. Jensen, Harvard University, "Paying People to Lie: The Truth About the Budget Process"

Discussant: Jeremy C. Stein, NBER and Harvard University

Mihir A. Desai, NBER and Harvard University; C. Fritz Foley, Harvard University; and James R. Hines Jr., NBER and University of Michigan, "Dividend Policy Inside the Firm"

Discussant: Stewart C. Myers, NBER and MIT

David S. Scharfstein, NBER and MIT, and Denis Gromb, London Business School, "Entrepreneurial Activity in Equilibrium"

Discussant: Per J. Stromberg, University of Chicago

Robert Parrino, University of Texas; Allen M. Poteshman, University of Illinois; and Michael S. Weisbach, NBER and University of Illinois, "Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects"

Discussant: Peter Tufano, NBER and Harvard University

Luigi Zingales, NBER and University of Chicago; Luigi Guiso, University of Sassari, Ente "Luigi Einaudi"; and Paola Sapienza, Northwestern University, "The Real Effects of Local Financial Development"

Discussant: Andrei Shleifer, NBER and Harvard University

Heitor Almeida, New York University; Renee B. Adams, Federal Reserve Bank of New York; and Daniel Ferreira, University of Chicago, "Fallible Executives, Centralization of Decisionmaking, and Corporate Performance"

Discussant: Laurie Hodrick, Columbia University

Harrison Hong, Stanford University, and Jeffrey D. Kubik, Syracuse University, "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts"

Discussants: Bengt R. Holmstrom, MIT

Jensen analyzes the counterproductive effects associated with using budgets or targets in an organization's performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to "game" the system and, in doing so, to destroy value in two main ways: first, both superiors and subordinates lie in the formulation of budgets and therefore gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organization. Second, they game the realization of the budgets or targets, and in doing so destroy value for their organizations. Although most managers and analysts understand that budget gaming is widespread, few...