Agency Conflicts and Short- vs Long-Termism in Corporate Policies
64 Pages Posted: 18 Dec 2017 Last revised: 5 May 2020
Date Written: August 13, 2019
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
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