A Dynamic Agency Theory of Investment and Managerial Replacement

Hiroshi Osano and Keiichi Hori

No 921, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: In this paper, we explore a dynamic theory of investment and costly managerial turnover given agency conflicts between the firm manager and investors. We incorporate the possibility of the successive replacement of managers until the firm is finally liquidated, and develop a continuous-time agency model with the q-theory of investment. We derive the dynamic variations of average q, marginal q, and the optimal investment?capital ratio surrounding manager turnover. Furthermore, we also indicate that the firm’s optimal replacement/ retention decision becomes more permissive with the frequency of the replacement of managers. Our theoretical findings yield empirical implications for the joint dynamics of investment and CEO turnover policy, which are consistent with evidence provided by the existing empirical literature, and provide novel testable hypotheses.

Keywords: average q; CEO turnover; continuous-time agency model; investment; marginal q (search for similar items in EconPapers)
JEL-codes: D86 D92 G31 G32 M12 M51 (search for similar items in EconPapers)
Pages: 46pages
Date: 2015-02
New Economics Papers: this item is included in nep-bec and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:921

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