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Agency Conflicts and Short- vs Long-Termism in Corporate Policies

Author

Listed:
  • Sebastian Gryglewicz

    (Erasmus University Rotterdam)

  • Simon Mayer

    (Erasmus University Rotterdam)

  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

Abstract

We develop a dynamic agency model in which the agent controls both current earnings via short-term effort and firm growth via long-term effort. Under the optimal contract, agency conflicts can induce both over- and underinvestment in short- and long-term efforts, leading to short- or long-termism in corporate policies. The paper 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- vs. long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts, rationalizing the asymmetric benchmarking observed in the data.

Suggested Citation

  • Sebastian Gryglewicz & Simon Mayer & Erwan Morellec, 2018. "Agency Conflicts and Short- vs Long-Termism in Corporate Policies," Swiss Finance Institute Research Paper Series 18-16, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1816
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089786
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    Cited by:

    1. Małgorzata Janicka & Aleksandra Pieloch-Babiarz & Artur Sajnóg, 2020. "Does Short-Termism Influence the Market Value of Companies? Evidence from EU Countries," JRFM, MDPI, vol. 13(11), pages 1-22, November.
    2. Matthijs Breugem & Roberto Marfè & Francesca Zucchi, 2020. "Corporate Policies and the Term Structure of Risk," Carlo Alberto Notebooks 627, Collegio Carlo Alberto.

    More about this item

    Keywords

    Agency conflicts; Multi-tasking; Optimal short- and long-termism;
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