Agency, firm growth, and managerial turnover

Ronald W. Anderson, Maria Cecilia Bustamante and Stéphane Guibaud

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is more capable of growing the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. Firms may pay severance to incentivize their managers to report truthfully the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract implies excessive retention.

JEL-codes: D82 D86 D92 G30 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2012-09-10
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119042

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