Optimal Short-Termism

Optimal Short-Termism

Dirk Hackbarth, Alejandro Rivera, Tak-Yuen Wong

Series number :

Serial Number: 
546/2018

Date posted :

January 22 2018

Last revised :

June 03 2021
SSRN Share

Keywords

  • capital structure • 
  • contracting • 
  • Multi-tasking

This paper develops a dynamic contracting (multi-tasking) model of a levered firm. In particular, the manager selects long-term and short-term efforts and shareholders choose optimal debt and default policies.

Excessive short-termism ex-post is optimal for shareholders, because debt has an asymmetric effect: shareholders receive all gains from short-term effort but share gains from long-term effort. We find that grim growth prospects and shareholder impatience imply higher optimal levels of shorttermism. Also, an incentive cost effect and a real option effect create non-trivial patterns for the endogenous default threshold. Finally, we quantify agency costs of excessive short-termism, which underscore the economic significance of our results.

Authors

Real name:
Alejandro Rivera
Real name:
Tak-Yuen Wong