Abstract

http://ssrn.com/abstract=2048039
 
 

References (42)



 
 

Citations (36)



 


 



Dynamic Agency and the Q Theory of Investment


Peter M. DeMarzo


Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Michael J. Fishman


Kellogg School of Management - Department of Finance

Zhiguo He


University of Chicago - Booth School of Business, and NBER

Neng Wang


Columbia Business School - Finance and Economics

April 29, 2012

Journal of Finance, Forthcoming

Abstract:     
We develop an analytically-tractable model integrating the dynamic theory of investment with dynamic optimal incentive contracting, thereby endogenizing financing constraints. Incentive contracting generates a history-dependent wedge between marginal and average q, and both vary over time as good (bad) performance relaxes (tightens) financing constraints. Financial slack, not cash flow, is the appropriate proxy for financing constraints. Investment decreases with firm-specific risk, and is positively correlated with past profits, past investment, and managerial compensation even with time-invariant investment opportunities. Optimal contracting involves deferred compensation; possible termination; and compensation that depends on exogenous observable persistent profitability shocks, effectively paying managers for luck.

Number of Pages in PDF File: 70

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Date posted: April 30, 2012  

Suggested Citation

DeMarzo, Peter M. and Fishman, Michael J. and He, Zhiguo and Wang, Neng, Dynamic Agency and the Q Theory of Investment (April 29, 2012). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2048039

Contact Information

Peter M. DeMarzo
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-736-1082 (Phone)
650-725-7979 (Fax)
HOME PAGE: http://www.stanford.edu/people/pdemarzo

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Michael Jay Fishman
Kellogg School of Management - Department of Finance ( email )
Evanston, IL 60208
United States
847-491-8332 (Phone)
847-491-5719 (Fax)
Zhiguo He (Contact Author)
University of Chicago - Booth School of Business, and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

Chicago Booth School of Business Logo

Neng Wang
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

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References:  42
Citations:  36

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