Agency, Firm Growth and Managerial Turnover

56 Pages Posted: 28 Sep 2012

See all articles by Ronald W. Anderson

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

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.

Keywords: agency, compensation policy, firm growth, managerial turnover, optimal contracting, severance pay

JEL Classification: G30, G35

Suggested Citation

Anderson, Ronald W. and Bustamante, Maria Cecilia and Guibaud, Stephane, Agency, Firm Growth and Managerial Turnover (September 2012). CEPR Discussion Paper No. DP9147, Available at SSRN: https://ssrn.com/abstract=2153588

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)

London
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

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