Optimal short-termism and liquidity management

Zhiming Zhao, Shihui Wang and Pengfei Luo

Economics Letters, 2024, vol. 241, issue C

Abstract: We develop a dynamic multitasking model for a financially constrained firm that manages both current cash reserves through short-term effort incentives and firm growth via long-term effort incentives. We demonstrate that financing constraints lead to an overinvestment in short-term efforts compared to a scenario without such constraints, resulting in short-termism. In addition, we also show that both permanent and transitory shocks exert an ambiguous impact on the payout thresholds under conditions of positive correlation between the transitory and permanent shocks.

Keywords: Short-termism; Financing constraints; Liquidity management (search for similar items in EconPapers)
JEL-codes: G31 G35 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524002787

DOI: 10.1016/j.econlet.2024.111794

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