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Agency, Firm Growth and Managerial Turnover

Author

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

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.

Suggested Citation

  • Anderson, Ronald W. & Bustamante, Maria Cecilia & Guibaud, Stéphane, 2012. "Agency, Firm Growth and Managerial Turnover," CEPR Discussion Papers 9147, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9147
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    References listed on IDEAS

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    Cited by:

    1. Peter Cziraki & Moqi Xu, 2014. "Ceo Job Security And Risk-Taking," FMG Discussion Papers dp729, Financial Markets Group.
    2. Cziraki, Peter & Xu, Moqi, 2014. "CEO job security and risk-taking," LSE Research Online Documents on Economics 55909, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

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

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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