Short-Termism, Managerial Talent, and Firm Value

Abstract

This paper examines how the firm's choice of investment horizon interacts with rent-seeking by privately-informed, multi-tasking managers and the labor market. There are two main results. First, managers prefer longer-horizon projects that permit them to extract higher rents from firms, so short-termism involves lower agency costs and is value-maximizing for some firms. Second, when firms compete for managers, firms practicing short-termism attract better managerial talent when talent is unobservable, but larger firms that invest in long-horizon projects hire more talented managers when talent is revealed.

Keywords: Short-termism, Managerial Talent, Wage Contracting, Capital Budgeting, Project Choice, Labor Markets

JEL Classification: D82, D86, G31, G32, J41