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Agency, Firm Growth, and Managerial Turnover

  • Ronald W. Anderson
  • M. Cecilia Bustamante
  • Stéphane Guibaud

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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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp711.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp711.

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Date of creation: Sep 2012
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Handle: RePEc:fmg:fmgdps:dp711
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  2. Dirk Jenter & Katharina Lewellen, 2011. "CEO Preferences and Acquisitions," NBER Working Papers 17663, National Bureau of Economic Research, Inc.
  3. Gian Luca Clementi & Hugo Hopenhayn, 2002. "A Theory of Financing Constraints and Firm Dynamics," RCER Working Papers 492, University of Rochester - Center for Economic Research (RCER).
  4. Ron Anderson & Kjell G. Nyborg, 2001. "Financing and Corporate Growth under Repeated Moral Hazard," FMG Discussion Papers dp376, Financial Markets Group.
  5. Bruno Biais & Thomas Mariotti & Guillaume Plantin & Jean-Charles Rochet, 2007. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 345-390.
  6. Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, 01.
  7. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
  8. Roman Inderst & Holger M. Mueller, 2010. "CEO Replacement Under Private Information," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2935-2969, August.
  9. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 273-315, April.
  10. Casamatta, Catherine & Guembel, Alexander, 2007. "Managerial Legacies, Entrenchment and Strategic Inertia," IDEI Working Papers 442, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design," CEPR Discussion Papers 4753, C.E.P.R. Discussion Papers.
  12. repec:bla:restud:v:74:y:2007:i:2:p:345-390 is not listed on IDEAS
  13. Daniel F. Garrett & Alessandro Pavan, 2012. "Managerial Turnover in a Changing World," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 879 - 925.
  14. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
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