Agency Conflicts and Short- vs Long-Termism in Corporate Policies

Sebastian Gryglewicz, Simon Mayer and Erwan Morellec
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Simon Mayer: Erasmus University Rotterdam
Erwan Morellec: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute

No 18-16, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a dynamic agency model in which the agent controls both current earnings via short-term effort and firm growth via long-term effort. Under the optimal contract, agency conflicts can induce both over- and underinvestment in short- and long-term efforts, leading to short- or long-termism in corporate policies. The paper shows how firm characteristics shape the optimal contract and the horizon of corporate policies, thereby generating a number of novel empirical predictions on the optimality of short- vs. long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts, rationalizing the asymmetric benchmarking observed in the data.

Keywords: Agency conflicts; Multi-tasking; Optimal short- and long-termism (search for similar items in EconPapers)
Pages: 61 pages
Date: 2018-05
New Economics Papers: this item is included in nep-bec and nep-hrm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1816

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