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Agency, firm growth, and managerial turnover

Anderson, Ronald W., Bustamante, Maria Cecilia, Guibaud, Stéphane and Zervos, Mihail (2018) Agency, firm growth, and managerial turnover. Journal of Finance, 73 (1). 419 - 464. ISSN 0022-1082

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Identification Number: 10.1111/jofi.12583


We study the relation between firm growth and managerial incentive provision under moral hazard when a long-lived firm is operated by a sequence of managers. In our model, firms replace their managers not only upon poor performance to provide incentives, but also when outside managers are at a comparative advantage to lead the firm through a new growth phase. We show how the optimal contract can be implemented with a system of deferred compensation credit and bonuses, along with dismissal and severance policies. Firms with better investment prospects have higher managerial turnover and rely on more front-loaded compensation schemes. Growth-induced turnover can result in positive severance if the principal needs to incentivize the manager to truthfully report the arrival of a growth opportunity. Realized firm growth depends jointly on the exogenous arrival of growth opportunities and the severity of the moral hazard problem. We also find a new component of agency costs due to the spillover effect of the tenure of the incumbent manager onto the present value of future managers’ compensation.

Item Type: Article
Official URL:
Additional Information: © 2017 The American Finance Association
Divisions: Finance
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
D - Microeconomics > D9 - Intertemporal Choice and Growth > D92 - Intertemporal Firm Choice and Growth, Investment, or Financing
G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 09 Jan 2017 10:52
Last Modified: 20 Aug 2021 00:31

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