Working Paper: CEPR ID: DP5821
Authors: Francesca Cornelli; David D. Li
Abstract: This paper highlights the trade-off between the need to restructure a company and the need to provide managers with appropriate incentives to run it after the restructuring. In order to provide incentives, it is optimal to let managers acquire equity in the firm. However, the expectations to be able to buy shares in the future may create ex-ante incentives to delay restructuring. This effect is particularly important for events where managers can acquire a substantial number of shares, such as privatizations or MBOs. In equilibrium, the shares are not underpriced, but the delay in restructuring which took place in the period before reduces the value of the company. We report empirical evidence on MBOs and privatizations consistent with the model in this paper.
Keywords: management buyouts; managers incentives; privatizations
JEL Codes: G34; J33; P34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Managers' expectations regarding future share purchases (G34) | Delay in restructuring efforts (G33) |
| Delay in restructuring efforts (G33) | Decrease in firm's overall value (G32) |
| Expectation of future ownership (D84) | Distortion of managerial incentives (L21) |
| Distortion of managerial incentives (L21) | Underinvestment in necessary restructuring activities (G31) |
| Underinvestment in necessary restructuring activities (G31) | Loss in firm value during MBOs and privatizations (G34) |
| Expectation of future ownership (D84) | Suboptimal restructuring decisions (L21) |