Size Matters - “Over”investments in a Relational Contracting Setting

Englmaier, Florian und Fahn, Matthias (12. August 2014): Size Matters - “Over”investments in a Relational Contracting Setting. SFB/TR 15 Discussion Paper No. 506

Abstract

The corporate finance literature documents that managers tend to overinvest into physical assets. A number of theoretical contributions have aimed to explain this stylized fact, most of them focussing on a fundamental agency problem between shareholders and managers. The present paper shows that overinvestments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response if the scope of court-enforceable contracts is limited. In such an environment a firm has to rely on relational contracts in order to manage the agency relationship with its workforce. The paper shows that investments into physical productive assets enhance the enforceability of relational contracts and hence investments optimally are “too high”.

• Dokumententyp: Paper
• Keywords: relational contracts, corporate finance, capital investments
• Fakultät: Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems ; Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A4 - Unvollständige Verträge, Marktinteraktion und soziale Vergleichsprozesse
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: C73, D21, D86, G32
• Sprache: Englisch