Empire-Builders and Shirkers: Investment, Firm Performance, and Managerial Incentives

Abstract

Do firms systematically over-or underinvest as a result of agency problems?We develop a contracting model between shareholders and managers in which managers have private benefits or private costs of investment.Managers overinvest when they have private benefits and underinvest when they have private costs.Optimal incentive contracts mitigate the over-or underinvestment problem.We derive comparative static predictions for the equilibrium relationships between incentives from compensation, investment, and firm performance for both cases.The relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits or private costs of investment.In order to identify whether managers have private benefits or costs, we estimate the joint relationships between incentives and firm performance and between incentives and investment.Our empirical results show that both firm performance and investment are increasing in managerial incentives.These results are consistent with managers having private costs of investment.We find no support for overinvestment based on private benefits.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 67 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.