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Agency, firm growth, and managerial turnover

Anderson, Ronald W. and Bustamante, Maria Cecilia and Guibaud, Stéphane and Zervos, Mihail (2017) Agency, firm growth, and managerial turnover. Journal of Finance. ISSN 0022-1082 (In Press)

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Abstract

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: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information: © 2017 the American Finance Association
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 09 Jan 2017 10:52
Last Modified: 09 Mar 2017 08:21
URI: http://eprints.lse.ac.uk/id/eprint/68784

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