Agency, Firm Growth, and Managerial Turnover
AbstractWe 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 InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp711.
Date of creation: Sep 2012
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-30 (All new papers)
- NEP-BEC-2012-09-30 (Business Economics)
- NEP-CSE-2012-09-30 (Economics of Strategic Management)
- NEP-CTA-2012-09-30 (Contract Theory & Applications)
- NEP-HRM-2012-09-30 (Human Capital & Human Resource Management)
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