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Agency, Firm Growth, and Managerial Turnover

Author

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  • Ronald Anderson

    (LSE - London School of Economics and Political Science)

  • Cecilia Bustamante

    (LSE - London School of Economics and Political Science)

  • Stéphane Guibaud

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Mihail Zervos

    (LSE - London School of Economics and Political Science)

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 better able to grow 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. The use of golden parachutes is suboptimal, unless the firm needs to incentivize its managers to truthfully report the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract may imply excessive retention.

Suggested Citation

  • Ronald Anderson & Cecilia Bustamante & Stéphane Guibaud & Mihail Zervos, 2018. "Agency, Firm Growth, and Managerial Turnover," SciencePo Working papers Main hal-03391936, HAL.
    • Handle: RePEc:hal:spmain:hal-03391936
    DOI: 10.1111/jofi.12583
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03391936
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