CXO

Managerial Incentives, Capital Reallocation, And The Business Cycle

Download Now Date Added: Jan 2010
Format: PDF

This paper argues that when managers have private information about how productive assets are under their control and receive private benefits, substantial bonuses are required to induce less productive managers to declare that capital should be reallocated. Moreover, the need to provide incentives for managers to relinquish control links aggregate capital reallocation to executive compensation and turnover over the business cycle. Capital reallocation and managerial turnover are procyclical if expected managerial compensation increases with the number of managers hired. The agency problem between owners and managers makes bad times worse because capital is less productively deployed when agency costs render reallocation too costly.