Managerial incentives,capital reallocation,and the business cycle |
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Authors: | Andrea L. Eisfeldt Adriano A. Rampini |
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Affiliation: | 1. Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, USA;2. Duke University, Fuqua School of Business, 1 Towerview Drive, Durham, NC 27708, USA |
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Abstract: | We argue that when managers have private information about the productivity of assets under their control and receive private benefits, substantial bonuses are required to induce less productive managers to declare that capital should be reallocated. The need to provide incentives for managers to relinquish control links executive compensation to capital reallocation and managerial turnover over the business cycle, rendering them procyclical if expected managerial compensation increases when more managers are hired. Moreover, capital is less productively deployed in downturns because agency costs make reallocation more costly. Empirically, we find that both CEO turnover and executive compensation are remarkably procyclical. |
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Keywords: | E22 E32 E44 G34 |
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