Agency, Firm Growth and Managerial Turnover
Ronald W. Anderson
London School of Economics & Political Science (LSE) - Department of Accounting and Finance; Centre for Economic Policy Research (CEPR)
Maria Cecilia Bustamante
London School of Economics & Political Science (LSE)
SciencesPo - Department of Economics
September 10, 2012
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
Date posted: June 11, 2012 ; Last revised: September 11, 2012
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