Paper by Sebastian Gryglewicz and Simon Mayer published in the Journal of Financial Economics
The paper ‘Agency Conflicts and Short- versus Long-Termism in Corporate Policies' by research fellow Sebastian Gryglewicz (Erasmus University Rotterdam) and PhD students Simon Mayer (Erasmus University Rotterdam), and Erwan Morellec (Swiss Finance Institute, Switzerland) has been published in the Journal of Financial Economics.
We build a dynamic agency model in which the agent controls both current earnings via short-term investment and firm growth via long-term investment. Under the optimal contract, agency conflicts can induce short- and long-term investment levels beyond first best, leading to short- or long-termism in corporate policies. The paper analytically 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- versus long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts.
Sebastian Gryglewicz, Simon Mayer, and Erwan Morellec, “Agency Conflicts and Short- versus Long-Termism in Corporate Policies”, Journal of Financial Economics, Volume 136, Issue 3, June 2020, Pages 718-742, doi.org/10.1016/j.jfineco.2019.12.003.