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Work Ethic, Employment Contracts, and Firm ValueBruce I. CarlinUniversity of California, Los Angeles (UCLA) - Anderson School of Management Simon GervaisDuke University - Fuqua School of Business Journal of Finance, Forthcoming Abstract: We analyze how the work ethic of managers impacts a firm's employment contracts, riskiness, growth potential, and organizational structure. Flat contracts are optimal for diligent managers because they reduce risk-sharing costs, but they attract egoistic agents who shirk and unskilled agents who add no value. Stable, bureaucratic firms with low growth potential are more likely to gain value from managerial diligence. Firms that hire from a virtuous pool of agents are more conservative in their investments and have a horizontal corporate structure. Our theory also yields several testable implications that distinguish it from standard agency models.
Number of Pages in PDF File: 48 Keywords: agency theory, compensation contracts, ethics, virtue, incentives, firm structure, labor market JEL Classification: G30, J30, M14, J41, L23, D21, D69 working papers seriesDate posted: August 26, 2007 ; Last revised: May 18, 2008Suggested CitationContact Information
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