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Optimal timing of management turnover under agency problems

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Author Info

  • Hori, Keiichi
  • Osano, Hiroshi

Abstract

We explore the timing of the replacement of a manager as an important incentive mechanism, using a real options approach in a situation where the timing of the decision to replace the manager is related to a major change in a firm's strategies that involves spending large amounts of various sunk adjustment costs. Using a continuous-time agency setting, we show that when renegotiation is not possible, the early replacement of the manager of a lower quality project (prior to the first-best trigger level) occurs only if a moral hazard or an adverse selection problem exists. We also indicate that the possibility of renegotiation drastically changes the results.

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File URL: http://www.sciencedirect.com/science/article/B6V85-4WMDHDY-1/2/3dfa23d0b9cf18873e137d4878e07810
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 12 (December)
Pages: 1962-1980

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:12:p:1962-1980

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Agency CEO turnover Executive compensation Real options Renegotiation;

References

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Cited by:
  1. Meg Adachi-Sato, 2013. "Incentive Pay that Causes Inefficient Managerial Replacement ," CIRJE F-Series CIRJE-F-890, CIRJE, Faculty of Economics, University of Tokyo.
  2. Gijsbert Zwart & Peter Broer, 2012. "Optimal regulation of lumpy investments," CPB Discussion Paper 214, CPB Netherlands Bureau for Economic Policy Analysis.

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