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Work Ethic, Employment Contracts, and Firm Value

Authors

  • BRUCE IAN CARLIN,

  • SIMON GERVAIS

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    • Bruce Carlin is from the University of California at Los Angeles; Simon Gervais is from Duke University. The authors thank the anonymous Acting Editor, who provided valuable advice. The authors would also like to thank Alon Brav, Pino Lopomo, and David Robinson for helpful discussions throughout the project. Also providing useful comments and suggestions were Michael Brandt, Amil Dasgupta, Paolo Fulghieri, Shimon Kogan, Tracy Lewis, Rich Mathews, Curtis Taylor, two anonymous referees, and seminar participants at Duke University, Singapore Management University, National University of Singapore, Hong Kong University of Science and Technology, the University of California at Irvine, INSEAD, the University of North Carolina at Chapel Hill, and the annual conference of the Financial Research Association. All remaining errors are the authors' responsibility.


ABSTRACT

We analyze how the work ethic of managers impacts a firm's employment contracts, riskiness, growth potential, and organizational structure. Flat contracts are optimal for diligent managers because they reduce risk-sharing costs, but they attract egoistic agents who shirk and unskilled agents who add no value. Stable, bureaucratic firms with low growth potential are more likely to gain value from managerial diligence. Firms that hire from a virtuous pool of agents are more conservative in their investments and have a horizontal corporate structure. Our theory also yields several testable implications that distinguish it from standard agency models.

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