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.