Investment and CEO compensation under limited commitment

• 成果类型: Article
• 署名作者: Ai, Hengjie; Li, Rui
• 署名单位: University of Minnesota System; University of Minnesota Twin Cities; University of Massachusetts System; University of Massachusetts Boston
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2015.04.002
• 发表日期: 2015
• 页码: 452-472
• 关键词: Dynamic contract; limited commitment; INVESTMENT

摘要

We extend the neoclassical investment model (Hayashi, 1982) to allow for limited commitment on compensation contracts. We consider three types of limited commitment: (i) managers cannot commit to compensation contracts that provide lower continuation utility than their outside options; (ii) shareholders cannot commit to negative net present value (NPV) projects; (iii) both the managers and the shareholders cannot commit. We characterize the optimal contract under general convex adjustment cost functions and provide examples for which closed-form solutions can be obtained. We show that, as in the data, small firms invest more, grow faster, and have a higher Tobin's Q than large firms under the optimal contract In addition, the pattern of the dependence of chief executive officer (CEO) compensation on past performance implied by our model is also consistent with empirical evidence. (C) 2015 Elsevier B.V. All rights reserved.