Managerial incentives, capital reallocation, and the business cycle

Journal Article (Journal Article)

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. © 2007 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Eisfeldt, AL; Rampini, AA

Published Date

  • January 1, 2008

Published In

Volume / Issue

  • 87 / 1

Start / End Page

  • 177 - 199

International Standard Serial Number (ISSN)

  • 0304-405X

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2006.11.007

Citation Source

  • Scopus