Agency conflicts and short- versus long-termism in corporate policies

Sebastian Gryglewicz, Simon Mayer and Erwan Morellec

Journal of Financial Economics, 2020, vol. 136, issue 3, 718-742

Abstract: 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: Optimal short- and long-termism; Agency conflicts; Multitasking (search for similar items in EconPapers)
JEL-codes: D86 D92 G30 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:3:p:718-742

DOI: 10.1016/j.jfineco.2019.12.003

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