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Size Matters - \'Over\'investments in a Relational Contracting Setting

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  • Englmaier, Florian

    (LMU Munich)

  • Fahn, Matthias

    (JKU Linz)

Abstract

The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylized fact, most of them focusing on a fundamental agency problem between shareholders and managers. The present paper shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce, and if it faces a volatile environment, investments into general, non-relationship-specific, capital can increase the efficiency of a firm\'s labor relations.

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  • Englmaier, Florian & Fahn, Matthias, 2018. "Size Matters - \'Over\'investments in a Relational Contracting Setting," Rationality and Competition Discussion Paper Series 62, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:62
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    Cited by:

    1. Matthias Fahn & Valeria Merlo & Georg Wamser, 2019. "The Commitment Role of Equity Financing," Journal of the European Economic Association, European Economic Association, vol. 17(4), pages 1232-1260.

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    More about this item

    Keywords

    relational contracts; corporate finance; capital investments;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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