Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Managerial turnover and entrenchment

Managerial turnover and entrenchment We consider a two‐period model in which the success of the firm depends on the effort of a first‐period manager (the incumbent) as well as the effort and ability of a second‐period manager. At the end of the first period, the board receives a noisy signal of the incumbent manager's ability and decides whether to retain or replace the incumbent manager. We show that severance pay can be utilized in the optimal contract to provide a credible commitment to a lenient second‐period equilibrium replacement policy, mitigating the first‐period moral hazard problem. Unlike existing models that aim to rationalize managerial entrenchment, we identify conditions on the information structure under which both entrenchment and anti‐entrenchment emerge in the optimal contract. Specifically, our model predicts that it is optimal for the board to design a contract to induce entrenchment (respectively, anti‐entrenchment) if the signal regarding the incumbent manager's ability becomes sufficiently uninformative (respectively, informative). http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Managerial turnover and entrenchment

Download PDF
30 pages

Loading next page...
 
/lp/wiley/managerial-turnover-and-entrenchment-JEhR7hGwf2

References (32)

Publisher
Wiley
Copyright
© 2018 Wiley Periodicals, Inc.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12248
Publisher site
See Article on Publisher Site

Abstract

We consider a two‐period model in which the success of the firm depends on the effort of a first‐period manager (the incumbent) as well as the effort and ability of a second‐period manager. At the end of the first period, the board receives a noisy signal of the incumbent manager's ability and decides whether to retain or replace the incumbent manager. We show that severance pay can be utilized in the optimal contract to provide a credible commitment to a lenient second‐period equilibrium replacement policy, mitigating the first‐period moral hazard problem. Unlike existing models that aim to rationalize managerial entrenchment, we identify conditions on the information structure under which both entrenchment and anti‐entrenchment emerge in the optimal contract. Specifically, our model predicts that it is optimal for the board to design a contract to induce entrenchment (respectively, anti‐entrenchment) if the signal regarding the incumbent manager's ability becomes sufficiently uninformative (respectively, informative).

Journal

Journal of Economics & Management Strategy – Wiley

Published: Oct 1, 2018

There are no references for this article.