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Agency, Firm Growth, and Managerial Turnover

Ronald W. Anderson, M. Cecilia Bustamante and Stéphane Guibaud

FMG Discussion Papers from Financial Markets Group

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.

Date: 2012-09
New Economics Papers: this item is included in nep-bec, nep-cse, nep-cta and nep-hrm
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Working Paper: Agency, Firm Growth and Managerial Turnover (2012) Downloads
Working Paper: Agency, firm growth, and managerial turnover (2012) Downloads
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