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Agency, Firm Growth and Managerial Turnover

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  • Anderson, Ronald W.
  • Bustamante, Maria Cecilia
  • Guibaud, Stéphane
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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 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.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9147.

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    Date of creation: Sep 2012
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    Handle: RePEc:cpr:ceprdp:9147

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    Related research

    Keywords: agency; compensation policy; firm growth; managerial turnover; optimal contracting; severance pay;

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