Corporate short-termism and the use of performance-sensitive debt

Zixia Miao, Yiping Huang and Yingyi Lv

Finance Research Letters, 2025, vol. 75, issue C

Abstract: We develop a dynamic agency model to investigate the impacts of performance-sensitive debt (PSD) on managers’ long-term and short-term efforts. Compared with straight debt, PSD reduces incentive costs and, in turn, increases long-term managerial effort. Moreover, PSD mitigates the excessive pursuit of short-term efforts when long-term and short-term efforts are substitutes, thereby alleviating short-termism. Our analysis provides an explanation for the use of PSD in the context of managerial multitasking, particularly among smaller firms.

Keywords: Performance-sensitive debt; Contracting; Financing (search for similar items in EconPapers)
JEL-codes: G31 G33 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000996

DOI: 10.1016/j.frl.2025.106834

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