Managerial turnover and the theory of short-termism

Abstract

This paper presents a novel theory of managerial short-termism that is based on managerial turnover. The key feature is that if managers' rewards are based on current profitability, and there is some probability of managerial turnover, then rational own-reward maximizing managers may choose projects that have intrinsically lower net present values but yield higher returns in the earlier part of their lives. This is because managers recognize that the existence of turnover means that there is some probability they won't be around to enjoy the returns generated by long-term projects.