Optimal Short-Termism

Dirk Hackbarth, Alejandro Rivera () and Tak-Yuen Wong ()
Additional contact information
Alejandro Rivera: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75083
Tak-Yuen Wong: Department of Quantitative Finance, National Tsing Hua University, Hsinchu 300044, Taiwan

Management Science, 2022, vol. 68, issue 9, 6477-6505

Abstract: This paper develops a dynamic contracting (multitasking) model of a levered firm. In particular, the manager selects long-term and short-term efforts, and shareholders choose optimal debt and default policies. Excessive short-termism ex post is optimal for shareholders because debt has an asymmetric effect: shareholders receive all gains from short-term effort but share gains from long-term effort. We find that grim growth prospects and shareholder impatience imply higher optimal levels of short-termism. Also, an incentive cost effect and a real option effect create nontrivial patterns for the endogenous default threshold. Finally, we quantify agency costs of excessive short-termism, which underscore the economic significance of our results.

Keywords: capital structure; contracting; multitasking (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://dx.doi.org/10.1287/mnsc.2021.4139 (application/pdf)

Related works:
Working Paper: Optimal Short-Termism (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:9:p:6477-6505

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