Size Matters - \'Over\'investments in a Relational Contracting Setting

Florian Englmaier and Matthias Fahn

No 62, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylized fact, most of them focusing on a fundamental agency problem between shareholders and managers. The present paper shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce, and if it faces a volatile environment, investments into general, non-relationship-specific, capital can increase the efficiency of a firm\'s labor relations.

Keywords: relational contracts; corporate finance; capital investments (search for similar items in EconPapers)
JEL-codes: C73 D21 D86 G32 (search for similar items in EconPapers)
Date: 2018-01-08
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-hrm and nep-mic
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Working Paper: Size Matters - "Over"investments in a Relational Contracting Setting (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:62

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