Dynamic multitasking and managerial investment incentives

Florian Hoffmann and Sebastian Pfeil

Journal of Financial Economics, 2021, vol. 142, issue 2, 954-974

Abstract: We study non-contractible intangible investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance, which deteriorates with investment in the firm’s future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance. Investment is distorted upwards (downwards) relative to first-best in firms with high (low) returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints, implying negative (positive) investment-cash flow sensitivities. Our results shed light on how corporate investment policies, liquidity management, and executive compensation structure differ across industries with different returns to intangible investment.

Keywords: Continuous time contracting; Multiple tasks; Delegated investment; Managerial compensation; Investment dynamics (search for similar items in EconPapers)
JEL-codes: D86 D92 J33 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:954-974

DOI: 10.1016/j.jfineco.2021.06.027

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