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Agency, firm growth, and managerial turnover

Ronald W. Anderson, Maria Cecilia Bustamante, Stéphane Guibaud and Mihail Zervos

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

Abstract: We study the relation between firm growth and managerial incentive provision under moral hazard when a long-lived firm is operated by a sequence of managers. In our model, firms replace their managers not only upon poor performance to provide incentives, but also when outside managers are at a comparative advantage to lead the firm through a new growth phase. We show how the optimal contract can be implemented with a system of deferred compensation credit and bonuses, along with dismissal and severance policies. Firms with better investment prospects have higher managerial turnover and rely on more front-loaded compensation schemes. Growth-induced turnover can result in positive severance if the principal needs to incentivize the manager to truthfully report the arrival of a growth opportunity. Realized firm growth depends jointly on the exogenous arrival of growth opportunities and the severity of the moral hazard problem. We also find a new component of agency costs due to the spillover effect of the tenure of the incumbent manager onto the present value of future managers’ compensation.

Keywords: Dynamic contracting; managerial turnover; growth; moral hazard (search for similar items in EconPapers)
JEL-codes: D82 D86 D92 G30 (search for similar items in EconPapers)
Date: 2017-11-16
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-hrm and nep-mic
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Published in Journal of Finance, 16, November, 2017. ISSN: 0022-1082

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