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Optimal short-termism and liquidity management

Author

Listed:
  • Zhao, Zhiming
  • Wang, Shihui
  • Luo, Pengfei

Abstract

We develop a dynamic multitasking model for a financially constrained firm that manages both current cash reserves through short-term effort incentives and firm growth via long-term effort incentives. We demonstrate that financing constraints lead to an overinvestment in short-term efforts compared to a scenario without such constraints, resulting in short-termism. In addition, we also show that both permanent and transitory shocks exert an ambiguous impact on the payout thresholds under conditions of positive correlation between the transitory and permanent shocks.

Suggested Citation

  • Zhao, Zhiming & Wang, Shihui & Luo, Pengfei, 2024. "Optimal short-termism and liquidity management," Economics Letters, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524002787
    DOI: 10.1016/j.econlet.2024.111794
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    References listed on IDEAS

    as
    1. Hoffmann, Florian & Pfeil, Sebastian, 2021. "Dynamic multitasking and managerial investment incentives," Journal of Financial Economics, Elsevier, vol. 142(2), pages 954-974.
    2. Dirk Hackbarth & Alejandro Rivera & Tak-Yuen Wong, 2022. "Optimal Short-Termism," Management Science, INFORMS, vol. 68(9), pages 6477-6505, September.
    3. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2020. "Agency conflicts and short- versus long-termism in corporate policies," Journal of Financial Economics, Elsevier, vol. 136(3), pages 718-742.
    4. Luo, Pengfei & Tian, Yuan, 2022. "Investment, payout, and cash management under risk and ambiguity," Journal of Banking & Finance, Elsevier, vol. 141(C).
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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