3. Managerial incentives As will be discussed in much greater length in Chapters 11 and 12, the alignment of managerial incentives with those of shareholders enjoying limited liability is likely to lead to a focus by managers on maximising short-term equity values. This can be done most easily by buy-backs, i.e. using profits to increase leverage by substituting debt for equity; but short-term profitability can also be enhanced by cutting back on longer-term fixed investment and R&D. This line of argument has been stressed by Smithers in several books (see Smithers, 2009, 2013, 2019).
