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Motivating Entrepreneurial Activity in a Firm

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  • Antonio E. Bernardo
  • Hongbin Cai
  • Jiang Luo

Abstract

We examine the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report private information truthfully. The optimal policy is to underinvest (compared to first-best) and provide weak incentive pay in low-quality projects and overinvest (compared to first-best) and provide strong incentive pay in high-quality projects. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Antonio E. Bernardo & Hongbin Cai & Jiang Luo, 2009. "Motivating Entrepreneurial Activity in a Firm," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1089-1118, March.
    • Handle: RePEc:oup:rfinst:v:22:y:2009:i:3:p:1089-1118
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    Cited by:

    1. Jan Zabojnik, 2016. "Firm Reputation And Employee Startups," Working Paper 1362, Economics Department, Queen's University.
    2. Sandro Brusco & Fausto Panunzi, 2020. "Internal financing, managerial compensation and multiple tasks," Annals of Finance, Springer, vol. 16(4), pages 501-527, December.
    3. Stanley Baiman & Mirko S. Heinle & Richard Saouma, 2013. "Multistage Capital Budgeting with Delayed Consumption of Slack," Management Science, INFORMS, vol. 59(4), pages 869-881, April.
    4. Krasteva, Silvana & Sharma, Priyanka & Wagman, Liad, 2015. "The 80/20 rule: Corporate support for innovation by employees," International Journal of Industrial Organization, Elsevier, vol. 38(C), pages 32-43.
    5. Szydlowski, Martin, 2019. "Incentives, project choice, and dynamic multitasking," Theoretical Economics, Econometric Society, vol. 14(3), July.
    6. Kim, Doyoung, 2013. "Delegation of information verification," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 488-500.
    7. Orman, Cuneyt, 2015. "Organization of innovation and capital markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 94-114.
    8. Dutta, Sunil & Fan, Qintao, 2012. "Incentives for innovation and centralized versus delegated capital budgeting," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 592-611.
    9. Natarajan Balasubramanian & Mariko Sakakibara, 2021. "Incidence and Performance of Spinouts and Incumbent New Ventures: Role of Selection and Redeployability within Parent Firms," Working Papers 21-27, Center for Economic Studies, U.S. Census Bureau.
    10. Thomas Hellmann & Veikko Thiele, 2011. "Incentives and Innovation: A Multitasking Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 78-128, February.
    11. Berchtold, Demian & Dichter, Oliver & Loderer, Claudio & Waelchli, Urs, 2021. "Pension risk and corporate investment distortion," Journal of Corporate Finance, Elsevier, vol. 68(C).

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