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Agency, Firm Growth and Managerial TurnoverRonald W. AndersonLondon School of Economics & Political Science (LSE) - Department of Accounting and Finance; Centre for Economic Policy Research (CEPR); Université Catholique de Louvain - School of Economic and Social Research Maria Cecilia BustamanteLondon School of Economics & Political Science (LSE) Stephane GuibaudLondon School of Economics & Political Science (LSE) September 10, 2012 Abstract: We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is more capable of growing the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. Firms may pay severance to incentivize their managers to report truthfully the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract implies excessive retention.
Number of Pages in PDF File: 52 Keywords: dynamic contracting, managerial turnover, growth, moral hazard JEL Classification: G30, D82, D86, D92 working papers seriesDate posted: June 11, 2012 ; Last revised: September 11, 2012Suggested CitationContact Information
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