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Managerial Incentives for Short-term Results

Authors

  • M. P. NARAYANAN

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    • Assistant Professor, Department of Finance, College of Business Administration, University of Florida. I wish to thank the participants of the 1985 Western Finance Association Conference held at Scottsdale, Arizona, for their comments on an earlier version of this paper presented there. I am grateful to the referee for the many useful suggestions which have greatly enhanced the presentation. Errors, if any, are solely my responsibility.


ABSTRACT

Of late, concern has been expressed that American managers tend to make decisions that yield short-term gains at the expense of the long-term interests of the shareholders. In this paper, we have attempted to investigate managerial incentives for such decisions. We find that, when the manager has private information regarding his or her decisions, there exist situations wherein the manager has incentives to make decisions which yield short-term profits but are not in the stockholders best interests. This incentive for suboptimal decisions arises because the manager, by taking decisions yielding short-term profits, hopes to enhance his reputation earlier, thus boosting his wages. We also find that this incentive is inversely related to her experience, the duration of her contract, and the risk of the firm.

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