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Internal Financing, Managerial Compensation and Multiple Tasks

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  • Sandro Brusco
  • Fausto Panunzi

Abstract

We study the optimal capital budgeting policy of a firm taking into account the choice between internal and external financing. The manager can dedicate effort either to increase the short-term profitability of the firm, thus generating greater immediate cash-flow, or to improve long-term perspectives. When both types of effort are observable, low return firms end up using internal funds, while high return firms use external capital markets. When effort to boost short-term cash flow is observable, while effort to boost long-term profitability is not, non-monotonic policies may be optimal, that is. Financing switches back and forth between internal and external funds as the quality of the project increases.

Suggested Citation

  • Sandro Brusco & Fausto Panunzi, 2018. "Internal Financing, Managerial Compensation and Multiple Tasks," Department of Economics Working Papers 18-03, Stony Brook University, Department of Economics.
    • Handle: RePEc:nys:sunysb:18-03
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    References listed on IDEAS

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    Cited by:

    1. Zdenek Tousek & Jana Hinke & Barbora Gregor & Martin Prokop, 2023. "How does the effect of external financing on profitability differ across tiers? Evidence from the automotive supply chain," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 26(2), pages 105-121, June.

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