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Agency, Firm Growth and Managerial Turnover

117 Pages Posted: 11 Jun 2012 Last revised: 23 Dec 2016

Ronald W. Anderson

London School of Economics & Political Science - Department of Finance; Centre for Economic Policy Research (CEPR)

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Stéphane Guibaud

SciencesPo - Department of Economics

Mihail Zervos

University of London - Department of Mathematics

Multiple version iconThere are 2 versions of this paper

Date Written: December 22, 2016

Abstract

We study managerial incentive provision under moral hazard in an environment where growth opportunities arrive stochastically over time and taking them requires a change of management. The firm faces a trade-off between the benefit of always having a manager able to seize new opportunities and the cost of incentive provision. The optimal dynamic contract may grant partial job protection whereby the firm insulates its managers from the risk of growth-induced dismissal and foregoes attractive opportunities when they come after periods of good performance. Moreover, the prospect of growth-induced turnover limits the firm’s ability to rely on deferred pay — resulting in more front-loaded compensation. The empirical evidence for the U.S. is broadly supportive of the model’s predictions. Firms with better growth prospects experience higher CEO turnover and use more front-loaded compensation.

Keywords: dynamic contracting, managerial turnover, growth, moral hazard

JEL Classification: G30, D82, D86, D92

Suggested Citation

Anderson, Ronald W. and Bustamante, Maria Cecilia and Guibaud, Stéphane and Zervos, Mihail, Agency, Firm Growth and Managerial Turnover (December 22, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2081685 or http://dx.doi.org/10.2139/ssrn.2081685

Ronald W. Anderson (Contact Author)

London School of Economics & Political Science - Department of Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6204 (Phone)
+44 20 7955 7420 (Fax)

HOME PAGE: http://personal.lse.ac.uk/ANDERSOR/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Maria Cecilia Bustamante

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

Stephane Guibaud

SciencesPo - Department of Economics ( email )

28 Rue des Saints-Pères
Paris, 75007
France

Mihail Zervos

University of London - Department of Mathematics ( email )

Strand
Strand
London, WC2R 2LS
United Kingdom

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