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Dynamic multitasking and managerial investment incentives

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  • Hoffmann, Florian
  • Pfeil, Sebastian

Abstract

We study non-contractible intangible investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance, which deteriorates with investment in the firm’s future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance. Investment is distorted upwards (downwards) relative to first-best in firms with high (low) returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints, implying negative (positive) investment-cash flow sensitivities. Our results shed light on how corporate investment policies, liquidity management, and executive compensation structure differ across industries with different returns to intangible investment.

Suggested Citation

  • Hoffmann, Florian & Pfeil, Sebastian, 2021. "Dynamic multitasking and managerial investment incentives," Journal of Financial Economics, Elsevier, vol. 142(2), pages 954-974.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:2:p:954-974
    DOI: 10.1016/j.jfineco.2021.06.027
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    More about this item

    Keywords

    Continuous time contracting; Multiple tasks; Delegated investment; Managerial compensation; Investment dynamics;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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