Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107352
Authors: 
Englmaier, Florian
Fahn, Matthias
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper 5154
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”.
Subjects: 
relational contracts
corporate finance
capital investments
JEL: 
C73
D21
D86
G32
Document Type: 
Working Paper

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