Optimal Short-Termism

Dirk Hackbarth, Alejandro Rivera and Tak-Yuen Wong ()

No 12588, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies. There are three results. First, shareholders trade off the benefits of short-termism (current cash flows) against the benefits of higher growth from long-term effort (future cash flows), but because shareholders only split the latter with bondholders, they find short-termism ex-post optimal. Second, bright (grim) growth prospects imply lower (higher) optimal levels of short-termism. Third, the endogenous default threshold rises with the substitutability of tasks and, for a positive correlation of shocks, the endogenous default threshold is hump-shaped in the volatility of permanent shocks, but increases monotonically with the volatility of transitory shocks. Finally, we quantify agency costs of short-term and long-term effort, cost of short-termism, effects of investor time horizons, credit spreads, and risk-shifting.

Keywords: Capital structure; Contracting; Multi-tasking (search for similar items in EconPapers)
JEL-codes: D86 G13 G32 G33 J33 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://cepr.org/publications/DP12588 (application/pdf)

Related works:
Journal Article: Optimal Short-Termism (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12588

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP12588

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().