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Internal financing, managerial compensation and multiple tasks

Author

Listed:
  • Sandro Brusco

    (Stony Brook University)

  • Fausto Panunzi

    (Università Bocconi)

Abstract

We study the optimal capital budgeting policy of a firm taking into account the choice between internal and external financing. The manager can dedicate effort either to increase short-term profitability, thus generating greater immediate cash-flow, or to improve long-term perspectives. When both types of effort are observable, low productivity firms end up using internal funds, while high productivity firms use external capital markets. When effort to boost short-term cash flow is observable, while effort to boost long-term profitability is not, non-monotonic policies may be optimal. In such cases financing switches back and forth between internal and external funds as the quality of the project increases.

Suggested Citation

  • Sandro Brusco & Fausto Panunzi, 2020. "Internal financing, managerial compensation and multiple tasks," Annals of Finance, Springer, vol. 16(4), pages 501-527, December.
    • Handle: RePEc:kap:annfin:v:16:y:2020:i:4:d:10.1007_s10436-020-00375-z
    DOI: 10.1007/s10436-020-00375-z
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    References listed on IDEAS

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    Cited by:

    1. Zdenek Tousek & Jana Hinke & Barbora Gregor & Martin Prokop, 2023. "How does the effect of external financing on profitability differ across tiers? Evidence from the automotive supply chain," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 26(2), pages 105-121, June.

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    More about this item

    Keywords

    Capital budgeting; Multitask agent; Corporate finance; Mechanism design;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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