Managerial Incentives, Capital Reallocation, and the Business Cycle

48 Pages Posted: 16 Jan 2008

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Abstract

This paper argues that when managers have private information about how productive assets are under their control and receive private benefits, substantial bonuses are required to induce less productive managers to declare that capital should be reallocated. Moreover, the need to provide incentives for managers to relinquish control links aggregate capital reallocation to executive compensation and turnover over the business cycle. Capital reallocation and managerial turnover are procyclical if expected managerial compensation increases with the number of managers hired. The agency problem between owners and managers makes bad times worse because capital is less productively deployed when agency costs render reallocation too costly. Empirically we find that both CEO turnover and executive compensation are remarkably procyclical.

Keywords: Capital reallocation, CEO turnover, executive compensation, business cycle

JEL Classification: E22, E32, E44, G34

Suggested Citation

Eisfeldt, Andrea L. and Rampini, Adriano A., Managerial Incentives, Capital Reallocation, and the Business Cycle. Journal of Financial Economics (JFE), Vol. 87, pp. 177-199, 2008, Available at SSRN: https://ssrn.com/abstract=1083544

Andrea L. Eisfeldt

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Adriano A. Rampini (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708
United States
+1 919 660-7797 (Phone)
+1 919 660-8038 (Fax)

HOME PAGE: http://faculty.fuqua.duke.edu/~rampini/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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