Anderson, Ronald W., Bustamante, Maria Cecilia and Guibaud, Stéphane (2012) Agency, firm growth, and managerial turnover. . London School of Economics and Political Science, London, UK.
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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: | Monograph (Working Paper) |
|---|---|
| Official URL: | http://papers.ssrn.com/sol3/papers.cfm?abstract_id... |
| Additional Information: | © 2012 The Authors |
| 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 |
| Date Deposited: | 16 Apr 2012 15:57 |
| Last Modified: | 11 Dec 2024 19:07 |
| URI: | http://eprints.lse.ac.uk/id/eprint/43144 |
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