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Letting Go: Managerial Incentives and the Reallocation of Capital

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  • Adriano A. Rampini
  • Andrea L. Eisfeldt

Abstract

This paper studies the provision of incentives to reallocate capital when managers are reluctant to relinquish control and have private information about the productivity of assets under their control. We show that when managers get private benefits from running projects substantial bonuses are required to induce managers to declare that capital under their control is less productive and should be reallocated. When aggregate productivity and hence the number of projects is low and fewer managers are required to run projects such bonuses would leave managers with unnecessary rents. This means that it is more costly to induce reallocation and thus less capital is reallocated. From the investor's perspective, capital is more illiquid in bad times since too much of the gains from capital reallocation would accrue to managers.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 611.

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Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:611

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Related research

Keywords: capital reallocation; business cycles; corporate finance; managerial incentives;

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Cited by:
  1. Casamatta, Catherine & Guembel, Alexander, 2007. "Managerial Legacies, Entrenchment and Strategic Inertia," IDEI Working Papers 442, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Inderst, Roman & Mueller, Holger M, 2006. "CEO Compensation and Strategy Inertia," CEPR Discussion Papers 5713, C.E.P.R. Discussion Papers.
  3. Almeida, Heitor & Wolfenzon, Daniel, 2006. "Should business groups be dismantled? The equilibrium costs of efficient internal capital markets," Journal of Financial Economics, Elsevier, vol. 79(1), pages 99-144, January.

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