Agency, Firm Growth, and Managerial Turnover

Agency, Firm Growth, and Managerial Turnover We study managerial incentive provision under moral hazard when growth opportunities arrive stochastically and pursuing them requires a change in management. A trade‐off arises between the benefit of always having the “right” manager and the cost of incentive provision. The prospect of growth‐induced turnover limits the firm's ability to rely on deferred pay, resulting in more front‐loaded compensation. The optimal contract may insulate managers from the risk of growth‐induced dismissal after periods of good performance. The evidence for the United States broadly supports the model's predictions: Firms with better growth prospects experience higher CEO turnover and use more front‐loaded compensation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Agency, Firm Growth, and Managerial Turnover

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
© 2018 the American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/jofi.12583
Publisher site
See Article on Publisher Site

Abstract

We study managerial incentive provision under moral hazard when growth opportunities arrive stochastically and pursuing them requires a change in management. A trade‐off arises between the benefit of always having the “right” manager and the cost of incentive provision. The prospect of growth‐induced turnover limits the firm's ability to rely on deferred pay, resulting in more front‐loaded compensation. The optimal contract may insulate managers from the risk of growth‐induced dismissal after periods of good performance. The evidence for the United States broadly supports the model's predictions: Firms with better growth prospects experience higher CEO turnover and use more front‐loaded compensation.

Journal

The Journal of FinanceWiley

Published: Jan 1, 2018

References

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