Abstract
We study non-contractible intangible investment in a dynamic agency model with multitasking. The manager's short-term task determines current performance, which deteriorates with investment in the firm's future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance. Investment is distorted upwards (downwards) relative to first-best in firms with high (low) returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints, implying negative (positive) investment-cash flow sensitivities. Our results shed light on how corporate investment policies, liquidity management, and executive compensation structure differ across industries with different returns to intangible investment.
| Original language | English |
|---|---|
| Pages (from-to) | 954-974 |
| Number of pages | 21 |
| Journal | Journal of Financial Economics |
| Volume | 142 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Nov 2021 |
Bibliographical note
Funding Information:This paper benefited significantly from comments by the co-editor Ron Kaniel, and an anonymous referee. We also thank Patrick Bolton, Wei Cui (CICF discussant), Guido Friebel, Sebastian Gryglewicz, Roman Inderst, Peter Kondor, Christian Leuz, Stephan Luck, Thomas Mariotti, Konstantin Milbradt (AFA discussant), Jean-Charles Rochet, Paul Schempp, Vladimir Vladimirov, Neng Wang, John Zhu, and conference and seminar participants at AFA Boston, CICF Shanghai, Columbia Business School, Erasmus School of Economics, Frankfurt School of Finance and Management, Stockholm School of Economics, Tilburg University, University of Amsterdam, University of Bonn, and University of Z?rich for helpful comments. An earlier version of this paper has been circulated under the title ?A Dynamic Agency Theory of Delegated Investment.? Hoffmann gratefully acknowledges financial support from Internal Funds KU Leuven (STG/20/033). Pfeil gratefully acknowledges financial support by the University Research Priority Program ?FinReg? of the University of Z?rich.
Funding Information:
This paper benefited significantly from comments by the co-editor Ron Kaniel, and an anonymous referee. We also thank Patrick Bolton, Wei Cui (CICF discussant), Guido Friebel, Sebastian Gryglewicz, Roman Inderst, Peter Kondor, Christian Leuz, Stephan Luck, Thomas Mariotti, Konstantin Milbradt (AFA discussant), Jean-Charles Rochet, Paul Schempp, Vladimir Vladimirov, Neng Wang, John Zhu, and conference and seminar participants at AFA Boston, CICF Shanghai, Columbia Business School, Erasmus School of Economics, Frankfurt School of Finance and Management, Stockholm School of Economics, Tilburg University, University of Amsterdam, University of Bonn, and University of Zürich for helpful comments. An earlier version of this paper has been circulated under the title “A Dynamic Agency Theory of Delegated Investment.” Hoffmann gratefully acknowledges financial support from Internal Funds KU Leuven (STG/20/033). Pfeil gratefully acknowledges financial support by the University Research Priority Program “FinReg” of the University of Zürich.
Publisher Copyright:
© 2021 Elsevier B.V.