Maximizing the Market Value of a Firm to Choose Dynamic Policies for Managerial Hiring, Compensation, Firing and Tenuring.

Sequentially incentive compatible policies for compensation, replacement, and tenuring of chief executive officers (CEOs) exist when a firm maximizes its market value and CEOs maximize their expected utility of wealth. In equilibrium, these policies induce CEOs to implement their firm's highest profit potential. The market value of a firm increases following replacement of CEOs. The probability of removal of a CEO decreases in the expected profits of the firm, but increases in the CEO's risk aversion, the wage he can receive from the next best job opportunity, the cost of implementing instruction, and the firm's cost of capital. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.