Showing papers on "Agency cost published in 1988"

Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure

Abstract: This paper examines whether or not U.S.-based multinational corporations (MNCs) have different capital structures than U.S. domestic corporations (DCs), and if so, what causes the differences. In explaining the difference between the capital structures of MNCs and DCs, previous studies tended to directly discuss the relationships between international environmental factors (e.g., political risk, foreign exchange risk) and the capital structure. A framework of analysis is proposed in this paper that examines the influence of environmental factors on the firm-related capital structure determinants (e.g., agency costs, bankruptcy costs) that in turn affect the capital structure of the MNC. Among the determinants that are examined, more emphasis is placed on the discussion of agency costs since no previous studies have applied this concept in the international arena. Empirical tests were conducted to investigate whether MNCs are significantly different from DCs regarding agency costs of debt, bankruptcy costs, and capital structure. Contrary to conventional wisdom, the empirical findings show that MNCs do not have lower bankruptcy costs and that they tend to have lower debt ratios than DCs.

Bankruptcy and Agency Costs: Their Significance to the Theory of Optimal Capital Structure

Abstract: We support and generalize our original results (1978) in light of potential impediments to a pure market solution to agency problems and potential causal links between liquidation and bankruptcy. In the case of bankruptcy costs, market impediments are easily eliminated through the inclusion of simple provisions in corporate charters and bond indentures. Further, we demonstrate that recent attempts to link liquidation costs to capital structure are without merit. If the firm is to be liquidated on the basis of a rule other than one that maximizes the total value of all the claimants, arbitrage profits arise, and informal reorganization will discipline management to follow the liquidation rule that is optimal for existing securityholders. Also, we find that the pure market solution is not readily generalizable to other classes of agency problems, particularly the risk incentive problem. However, the alternative solution of the risk incentive problem through complex financing contracting may be useful in explaining complexities in contemporary financial contracts.

Corporate control and management compensation: Evidence on the agency problem

Abstract: This paper finds a relationship between management compensation and corporate control consistent with the hypothesis that in closely held companies major shareholders engage in monitoring activities that reduce the residual loss portion of agency costs. This result is incosistent with Fama's (1980) suggestion that the wage determination process in managerial labor markets may resolve the agency problem.

The Distribution of Power Among Corporate Managers, Shareholders, and Directors

Abstract: This article surveys the seventeen papers in this special issue of the Journal of Financial Economics, and related work. The major findings are: (1) patterns of stock ownership by insiders and outsiders can influence managerial behavior, corporate performance, and stockholder voting in election contests; (2) corporate leverage, inside stock ownership by managers, and the control market are interrelated; (3) departures from one share/one vote affect firm value and efficiency; (4) takeover resistance through defensive restructurings or poison pill provisions is associated with declines in share price; and (5) top management turnover is inversely related to share price performance.

Incentives for Accruing Costs and Efficiency in Regulated Monopolies Subject to ROE Constraint

Abstract: Incentive problems arise in the electric utilities industry as a consequence of the institutional and legal arrangements of the cost-plus pricing regime under which natural and statutory monopolies operate. In the United States, such monopolies operate under a cost recovery system that gives the firm a mechanism by which it can shift all or part of the cost of moral hazard risk to consumers, who then become the residual claimants (Sherman [1980]). In this setting, expense accruals have a more direct link to the firm's cash flows than is the case in unregulated industries. In particular, pricing a monopolist's output at cost-plus means that accruing expenses generates sales revenues for utilities. Consequently, agency cost can be included in the allowable cost passed on to consumers. The result is that the residual loss is shared between the consumers and shareholders with two competing consequences: (1) it would be in the best interest of shareholders to provide managers with incentives to shift all costs to the consumer; and, by the same token, (2)

Incentives for Accruing Costs and Efficiency in Regulated Monopolies Subject to Roe Constraint

Abstract: Incentive problems arise in the electric utilities industry as a consequence of the institutional and legal arrangements of the cost-plus pricing regime under which natural and statutory monopolies operate. In the United States, such monopolies operate under a cost recovery system that gives the firm a mechanism by which it can shift all or part of the cost of moral hazard risk to consumers, who then become the residual claimants (Sherman [1980]). In this setting, expense accruals have a more direct link to the firm's cash flows than is the case in unregulated industries. In particular, pricing a monopolist's output at cost-plus means that accruing expenses generates sales revenues for utilities. Consequently, agency cost can be included in the allowable cost passed on to consumers. The result is that the residual loss is shared between the consumers and shareholders with two competing consequences: (1) it would be in the best interest of shareholders to provide managers with incentives to shift all costs to the consumer; and, by the same token, (2) it would be in the consumers' interest to persuade regulators to challenge the cost assumptions underlying the firms' requests for revenue requirements.

Managerial Compensation and the Agency Costs of Debt Finance

Abstract: This paper presents a model of the agency costs of debt finance, based on the conflict of interest between shareholders and bondholders. We show how the terms of the compensation contract offered to management by shareholders can reduce these agency costs. We derive a managerial compensation contract that restores the first-best outcome and leads to a local irrelevance result for financial structure. More generally, the model points out that the nature of managerial compensation contracts will affect the firm's optimal financial structure, and offers a reason why managerial compensation is typically not closely correlated with shareholder returns.

Profit-Sharing Arrangements in a Team and the Cost of Information

Abstract: The LEN-Model (referring to "linear functions", "exponential utility" and "normal distribution" as major properties of the LEN-Model) allows to study profit-sharing agreements in a team of principal and agent. First, this article describes and analyses the LEN-Model again (which was originally presented in 1987 by the same author). Second, agency costs are identified and calculated. Agency costs in a principal-agent relationship are seen as an information value. The question behind the nature of agency costs is: how much would principal and agent be willing to pay to overcome the disadvantages of asymmetric information they have in their relationship. The answer is given by the information value.

Managerial Compensation and the Agency Costs of Debt Finance

Abstract: This paper presents a model of the agency costs of debt finance, based on the conflict of interest between shareholders and bondholders. We show how the terms of the compensation contract offered to management by shareholders can reduce these agency costs. We derive a managerial compensation contract that restores the first-best outcome and leads to a local irrelevance result for financial structure. More generally, the model points out that the nature of managerial compensation contracts will affect the firm's optimal financial structure, and offers a reason why managerial compensation is typically not closely correlated with shareholder returns.

Tobin's Q, investment, and endogenous adjustment of financial structure

Abstract: An analysis of a q model of investment in which financial structure affects firm value, using a perfect foresight model of general equilibrium that includes a debt-related agency cost; uses the comparative statics and dynamics of changing the corporate tax rate as an illustration.