Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/185732
Authors: 
Englmaier, Florian
Fahn, Matthias
Year of Publication: 
2018
Series/Report no.: 
Discussion Paper No. 62
Abstract: 
The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylized fact, most of them focusing on a fundamental agency problem between shareholders and managers. The present paper shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce, and if it faces a volatile environment, investments into general, non-relationship-specific, capital can increase the efficiency of a firm\'s labor relations.
Subjects: 
relational contracts
corporate finance
capital investments
JEL: 
C73
D21
D86
G32
Document Type: 
Working Paper

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