Anderson, Ronald W., Bustamante, Maria Cecilia, Guibaud, Stéphane and Zervos, Mihail 
ORCID: 0000-0001-5194-6881
(2018)
Agency, firm growth, and managerial turnover.
Journal of Finance, 73 (1).
419 - 464.
ISSN 0022-1082
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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: | https://onlinelibrary.wiley.com/journal/15406261 |
| 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 |
| Date Deposited: | 09 Jan 2017 10:52 |
| Last Modified: | 01 Oct 2024 03:44 |
| URI: | http://eprints.lse.ac.uk/id/eprint/68784 |
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