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

64 Pages Posted: 18 Dec 2017 Last revised: 5 May 2020

See all articles by Sebastian Gryglewicz

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Simon Mayer

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2019

Abstract

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

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

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Simon Mayer

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

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CH-1211 Geneva 4
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