Internal financing, managerial compensation and multiple tasks

Sandro Brusco () and Fausto Panunzi ()
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Sandro Brusco: Stony Brook University
Fausto Panunzi: Università Bocconi

Annals of Finance, 2020, vol. 16, issue 4, No 2, 527 pages

Abstract: Abstract We study the optimal capital budgeting policy of a firm taking into account the choice between internal and external financing. The manager can dedicate effort either to increase short-term profitability, thus generating greater immediate cash-flow, or to improve long-term perspectives. When both types of effort are observable, low productivity firms end up using internal funds, while high productivity firms use external capital markets. When effort to boost short-term cash flow is observable, while effort to boost long-term profitability is not, non-monotonic policies may be optimal. In such cases financing switches back and forth between internal and external funds as the quality of the project increases.

Keywords: Capital budgeting; Multitask agent; Corporate finance; Mechanism design (search for similar items in EconPapers)
JEL-codes: D86 G31 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-020-00375-z

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