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Dirk Hackbarth, Alejandro Rivera, Tak-Yuen Wong Optimal Short-Termism (22 Jan 2018) Available at ECGI: http://ecgi.global/working-paper/optimal-short-termism
This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies. There are three results.
First, shareholders trade off the benefits of short-termism (current cash flows) against the benefits of higher growth from long-term effort (future cash flows), but because shareholders only split the latter with bondholders, they find short-termism ex-post optimal. Second, bright (grim) growth prospects imply lower (higher) optimal levels of short-termism. Third, the endogenous default threshold rises with the substitutability of tasks and, for a positive correlation of shocks, the endogenous default threshold is hump-shaped in the volatility of permanent shocks, but increases monotonically with the volatility of transitory shocks. Finally, we quantify agency costs of short-term and long-term effort, cost of short-termism, effects of investor time horizons, credit spreads, and risk-shifting.
We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three...Read more
Dual-class voting systems have been widely employed in recent initial public offerings by large tech companies, but have been roundly condemned by institutional investors and the S&P 500. As an alternative, commentators have proposed adoption...Read more
This paper shows that short-term stock price concerns induce CEOs to take val- ue-reducing actions. Vesting equity, our measure of short-term concerns, is posi- tively associated with the probability of a rm...Read more
We show that following large permanent negative shocks, rms with more short- term institutional investors suffer smaller drops in sales, investment and employ- ment and have better long-term performance than similar rms affected by the shocks. To...Read more