Optimal timing of management turnover under agency problems
Keiichi Hori () and
Journal of Economic Dynamics and Control, 2009, vol. 33, issue 12, 1962-1980
We explore the timing of the replacement of a manager as an important incentive mechanism, using a real options approach in a situation where the timing of the decision to replace the manager is related to a major change in a firm's strategies that involves spending large amounts of various sunk adjustment costs. Using a continuous-time agency setting, we show that when renegotiation is not possible, the early replacement of the manager of a lower quality project (prior to the first-best trigger level) occurs only if a moral hazard or an adverse selection problem exists. We also indicate that the possibility of renegotiation drastically changes the results.
Keywords: Agency; CEO; turnover; Executive; compensation; Real; options; Renegotiation (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:12:p:1962-1980
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