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 short- versus long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts.
|Keywords||Agency conflicts, Multitasking, Optimal short- and long-termism|
|Persistent URL||dx.doi.org/10.1016/j.jfineco.2019.12.003, hdl.handle.net/1765/123545|
|Journal||Journal of Financial Economics|
Gryglewicz, S, Mayer, S. (Simon), & Morellec, E. (Erwan). (2019). Agency conflicts and short- versus long-termism in corporate policies. Journal of Financial Economics. doi:10.1016/j.jfineco.2019.12.003