Showing papers on "Agency cost published in 1982"
TL;DR: In this article, the authors present an analysis of the managerial incentive problem in a stock market economy in which incentive contracts are structured in terms of security ownership and the manager's ownership share signals effort and is determined endogenously as the solution to a special portfolio decision problem.
Abstract: This study presents an analysis of the managerial incentive problem in a stock market economy in which incentive contracts are structured in terms of security ownership. In our model, the manager's ownership share signals effort and is determined endogenously as the solution to a special portfolio decision problem. Managerial investment in the firm is evaluated under various security pricing arrangements. Our analysis indicates that, in general, stockholders should sell shares to a manager at a discount to ensure a Pareto efficient ownership (incentive) structure. However, efficient pricing (discount) schedules generally are nonlinear and, in many respects, isomorphic to discriminating price functions which have been considered in neoclassical models of monopoly. THE THEORY OF THE firm has evolved rapidly over the past decade. With the emergence of research in property rights and the economics of uncertainty, the firm is no longer regarded as a black box. Jensen and Meckling [JM] [10] presented an elaborate theory of financial/ownership structure based primarily on agency costs and other studies by Campbell [2], Leland and Pyle [12], and Ross [19, 20] have developed theories of signaling to explain the financial structure of the firm. While the issues and specific modeling approaches have varied, the problem of managerial incentives has been prominent in all these studies. In the JM [10] study, incentives were related directly to the manager's ownership proportion. Although the manager initially owned the entire firm, investment in new projects required outside financing and led to a managerial incentive problem.' Our model has implications directly related to the JM [10] study. The manager's ownership proportion also had an important role in the Leland and Pyle [12] model as a signal of the quality of new projects. In the Ross [20] study, the managerial incentive contract influenced the manager's activity choice and supported a signaling equilibrium.
32 citations
TL;DR: In particular, the economic theory of agency explicitly recognizes that when agents enter into synergistic relationships, each agent will act in a manner consistent with the maximization of its personal welfare, thus giving rise to a phenomenon called moral hazard as discussed by the authors.
Abstract: The behavior of economic agents in the presence of uncertainty about exogenous events and imperfect information about the endogenously influenced actions of other agents with whom they contract has been receiving growing attention. In particular, the economic theory of agency explicitly recognizes that when agents enter into synergistic relationships, each agent will act in a manner consistent with the maximization of its personal welfare, thus giving rise to a phenomenon called moral hazard. Harris and Raviv [8], Holmstrom [10], and Shavell [21] have analyzed the nature of Pareto-optimal contractual mechanisms designed to ameliorate moral hazard and achieve efficient risk sharing. Jensen and Meckling [12], Grossman and Hart [6], and Thakor and Gorman [22] have explored the impact of moral hazard on the capital structure decisions of firms. Arrow [1] explained the absence of complete contingent claims markets on the basis of moral hazard, and Harris and Raviv [7] have examined the impact of moral hazard on the structure of health insurance contracts.
20 citations
TL;DR: This paper found that firms forming captives had significantly higher use of debt in manufacturing but failed to show any significant difference for merchandising, in light of confounding influences from tax-clientele effects, size difference, and support in tests on U.S. firms.
Abstract: Agency theory is employed to formalize the intuitive rationale for the widespread practice of setting up captive finance subsidiaries: reduced agency costs of debt increase the firm's consolidated debt capacity. Of the two Canadian industries tested, firms forming captives had significantly higher use of debt in manufacturing but failed to show any significant difference for merchandising. In light of confounding influences from tax-clientele effects, size difference, and support in tests on U.S. firms, the mixed finding should encourage further testing. The outcome of these tests suggests that it is potentially useful to think of captive finance subsidiaries in light of agency theory.
4 citations
01 Jul 1982
TL;DR: In this paper, the authors combine insights from the theory of corporate finance and organization theory in the analysis of the relationship between a firm and those of its external investors that hold large percentages of its debt and/or equity.
Abstract: : Insights from the theory of corporate finance and organization theory are combined in the analysis of the relationship between a firm and those of its external investors that hold large percentages of its debt and/or equity. These types of investors are called primary investors, and it is argued that firms enhance their access to capital bey developing what Ouchi and Barney call clann assisted market relations with a small number of such investors. Implications of the theoretical discussion are tentatively tested using a sample of Japanese electronics firms. (Author)