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Optimal timing of management turnover under agency problems

Keiichi Hori () and Hiroshi Osano

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 12, 1962-1980

Abstract: 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)
Date: 2009
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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