Agency Conflicts and Short- vs Long-Termism in Corporate Policies

We build a dynamic agency model in which the agent controls both current earnings via short-term investment and firm growth via long-term investment. Under the optimal contract, agency conflicts can induce short- and long-term investment levels beyond first best, leading to short- or long-termism in corporate policies. The paper analytically shows how firm characteristics shape the optimal contract and the horizon of corporate policies, thereby generating a number of novel empirical predictions on the optimality of short- versus long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts.

Keywords: Optimal short- and long-termism, Agency conflicts, Multi-tasking

Suggested Citation: Suggested Citation

Gryglewicz, Sebastian and Mayer, Simon and Morellec, Erwan, Agency Conflicts and Short- vs Long-Termism in Corporate Policies (August 13, 2019). Journal of Financial Economics (JFE), Vol. 163, No. 3, 2020, Swiss Finance Institute Research Paper No. 18-16, Available at SSRN: https://ssrn.com/abstract=3089786 or http://dx.doi.org/10.2139/ssrn.3089786