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Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model

Author

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  • Hiroshi Osano

    () (Institute of Economic Research, Kyoto University)

  • Keiichi Hori

    () (Faculty of Economics, Ritsumeikan University)

Abstract

This paper explores a continuous-time agency model with double moral hazard. Using a venture capitalist—entrepreneur relationship where a manager provides unobservable effort while a venture capitalist (VC) both supplies unobservable effort and chooses the optimal timing of the initial public offering (IPO) with an irreversible investment, we show that optimal IPO timing is earlier under double moral hazard than under single moral hazard. Our results also indicate that the manager's compensation tends to be paid earlier under double moral hazard. We also derive several comparative static results for the IPO timing and managerial compensation profile, all of which provide new empirically testable implications. Usefully, even where the VC does not completely exit with the IPO, such that there is a requirement for a multiagent analysis after the IPO, most of our results remain unchanged. In addition, our model applies to not only the VC exit through the M&A (Mergers and Acquisitions) process but also the dissolution of joint ventures and corporate spin-offs.

Suggested Citation

  • Hiroshi Osano & Keiichi Hori, 2013. "Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model," KIER Working Papers 863, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:863
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP863.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. repec:bla:jecrev:v:68:y:2017:i:4:p:521-554 is not listed on IDEAS
    3. Keiichi Hori & Hiroshi Osano, 2017. "Agency Contracts, Noncommitment Timing Strategies and Real Options," The Japanese Economic Review, Japanese Economic Association, vol. 68(4), pages 521-554, December.
    4. Hiroshi Osano & Keiichi Hori, 2015. "A Dynamic Agency Theory of Investment and Managerial Replacement," KIER Working Papers 921, Kyoto University, Institute of Economic Research.

    More about this item

    Keywords

    two-sided moral hazard; IPO timing; managerial compensation; dynamic incentives; spin-offs;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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