Agency, Firm Growth, and Managerial Turnover

Ronald Anderson, Cecilia Bustamante and Stéphane Guibaud ()
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Ronald Anderson: LSE - London School of Economics and Political Science
Cecilia Bustamante: LSE - London School of Economics and Political Science
Stéphane Guibaud: LSE - London School of Economics and Political Science

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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 better able to grow 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. The use of golden parachutes is suboptimal, unless the firm needs to incentivize its managers to truthfully report the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract may imply excessive retention.

Keywords: Agency; Firm growth; Managerial turnover (search for similar items in EconPapers)
Date: 2013-12-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03470530
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