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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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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp711.

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Date of creation: Sep 2012
Date of revision:
Handle: RePEc:fmg:fmgdps:dp711
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  1. 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.
  2. 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.
  3. 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.
  4. Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," IDEI Working Papers 312, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2006.
  5. Ronald W. Anderson & Kjell G. Nyborg, 2001. "Financing and corporate growth under repeated moral hazard," LSE Research Online Documents on Economics 25050, London School of Economics and Political Science, LSE Library.
  6. Gian Luca Clementi & Hugo Hopenhagn, 2004. "A Theory of Financing Constraints and Firm Dynamics," Working Papers 04-25, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. 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.
  8. Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design," CEPR Discussion Papers 4753, C.E.P.R. Discussion Papers.
  9. Spear, Stephen E. & Wang, Cheng, 2005. "When to Fire a CEO: Optimal Termination in Dynamic Contracts," Staff General Research Papers 11443, Iowa State University, Department of Economics.
  10. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  11. Daniel Garrett & Alessandro Pavan, 2010. "Managerial Turnover in a Changing World," Discussion Papers 1490, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Dirk Jenter & Katharina Lewellen, 2011. "CEO Preferences and Acquisitions," CESifo Working Paper Series 3681, CESifo Group Munich.
  13. Catherine Casamatta & Alexander Guembel, 2010. "Managerial Legacies, Entrenchment, and Strategic Inertia," Journal of Finance, American Finance Association, vol. 65(6), pages 2403-2436, December.
  14. repec:bla:restud:v:74:y:2007:i:2:p:345-390 is not listed on IDEAS
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