Dynamic Multitasking and Managerial Investment Incentives

Posted: 20 Apr 2018

See all articles by Florian Hoffmann

Florian Hoffmann

University of Bonn

Sebastian Pfeil

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Date Written: April 17, 2018

Abstract

We study long-term investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance which deteriorates if he invests in the firm's future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance such that investment is distorted upwards (downwards) relative to first-best in firms with high (low) technological returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints arising from the agency problem, implying negative (positive) investment-cash flow sensitivities. Investment distortions and cash flow sensitivities increase in absolute terms with short-term performance pay and external financing costs.

Keywords: Continuous Time Contracting, Multiple Tasks, Delegated Investment, Managerial Compensation, Endogenous Financing Frictions, Investment Dynamics

JEL Classification: D86, D92, J33

Suggested Citation

Hoffmann, Florian and Pfeil, Sebastian, Dynamic Multitasking and Managerial Investment Incentives (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=3164471

Florian Hoffmann

University of Bonn ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

Sebastian Pfeil (Contact Author)

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

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

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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