Dynamic Multitasking and Managerial Investment Incentives
We study long-term investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance which deteriorates if he invests in the firm's future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance such that investment is distorted upwards (downwards) relative to first-best in firms with high (low) technological returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints arising from the agency problem, implying negative (positive) investment-cash flow sensitivities. Investment distortions and cash flow sensitivities increase in absolute terms with short-term performance pay and external financing costs.
|Keywords||Continuous Time Contracting, Multiple Tasks, Delegated Investment, Managerial Compensation, Endogenous Financing Frictions, Investment Dynamics|
|JEL||Economics of Contract Law (jel D86), Intertemporal Firm Choice and Growth, Investment, or Financing (jel D92), Compensation Packages; Payment Methods (jel J33)|
Hoffmann, F, & Pfeil, S. (2018). Dynamic Multitasking and Managerial Investment Incentives. Retrieved from http://hdl.handle.net/1765/109097