Abstract
This paper studies managerial entrenchment in the presence of a broadening market for managers. Some degree of entrenchment helps create value for shareholders and is therefore desirable, but it also increases the cost of managerial turnover. Firms resolve this trade-off and choose an optimal level of entrenchment for their incumbent CEOs. As managerial skills become less firm-specific and more portable across firms, the market for talent offers better replacement opportunities of incumbents managers. Equilibrium pay also increases but, overall, the profitability of hiring an external CEO increases at large firms, where managerial talent is most productive. As a consequence, large firms reduce the entrenchment of their incumbents to better take advantage of possible market replacements. Equilibrium outcomes can however be inefficient if managers are subject to moral hazard and can exert effort to improve their productivity.
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