Agency Conflicts and Short- versus Long-Termism in Corporate Policies
We build a dynamic agency model in which the agent controls both current earnings via short-term investment and firm growth via long-term investment. Under the optimal contract, agency conflicts can induce short- and long-term investment levels beyond first best, leading to short- or long-termism in corporate policies. The paper analytically shows how firm characteristics shape the optimal contract and the horizon of corporate policies, thereby generating a number of novel empirical predictions on the optimality of shortversus long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts.
|Keywords||Optimal short- and long-termism, agency conflicts, multitasking|
|JEL||Economics of Contract Law (jel D86), Intertemporal Firm Choice and Growth, Investment, or Financing (jel D92), Corporate Finance and Governance: General (jel G30)|
|Journal||Journal of Financial Economics|
Gryglewicz, S, Mayer, S, & Morellec, E. (2019). Agency Conflicts and Short- versus Long-Termism in Corporate Policies. Journal of Financial Economics, accepted. Retrieved from http://hdl.handle.net/1765/118825