Management Cycles

Why do well-established companies often lose managerial fidelity due to corporate scandals, and how do they restructure management to recover from corporate failures? In this study, we present a dynamic theory of management cycles by which firms endogenously switch between different management regimes over time. Firms accumulate managerial capital as intangible assets such as managerial knowledge, know-how, and skills over time. We show that current managers of a firm are disciplined by not only how much managerial capital accumulated through the prior business operations within the firm, but also by the market valuation about future profitability of the firm. Through such dynamic interactions, we show that management cycles endogenously emerge and persist over time