Optimal Short-Termism

58 Pages Posted: 30 Oct 2017 Last revised: 22 Jun 2021

See all articles by Dirk Hackbarth

Dirk Hackbarth

Boston University - Department of Finance & Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Alejandro Rivera

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Tak-Yuen Wong

National Tsing Hua University - Department of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 10, 2021

Abstract

This paper develops a dynamic contracting (multi-tasking) model of a levered firm. In particular, the manager selects long-term and short-term efforts and shareholders choose optimal debt and default policies. Excessive short-termism ex-post is optimal for shareholders, because debt has an asymmetric effect: shareholders receive all gains from short-term effort but share gains from long-term effort. We find that grim growth prospects and shareholder impatience imply higher optimal levels of short-termism. Also, an incentive cost effect and a real option effect create non-trivial patterns for the endogenous default threshold. Finally, we quantify agency costs of excessive short-termism, which underscore the economic significance of our results.

Keywords: Capital Structure, Contracting, Multi-Tasking

JEL Classification: D86, G13, G32, G33, J33

Suggested Citation

Hackbarth, Dirk and Rivera, Alejandro and Wong, Tak-Yuen, Optimal Short-Termism (June 10, 2021). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 546/2018, Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=3060869 or http://dx.doi.org/10.2139/ssrn.3060869

Dirk Hackbarth

Boston University - Department of Finance & Economics ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)

HOME PAGE: http://people.bu.edu/dhackbar/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Alejandro Rivera (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

HOME PAGE: http://jindal.utdallas.edu/faculty/alejandro-rivera

Tak-Yuen Wong

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
Taiwan

HOME PAGE: http://https://sites.google.com/site/etywong110/

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