Showing papers on "Agency cost published in 1999"

A Team Production Theory of Corporate Law

Abstract: A Team Production Theory of Corporate Law^ INTRODUCTION Who owns a corporation? Most economists and legal scholars today seem inclined to answer: Its shareholders do. Contemporary discussions of corporate governance have come to be dominated by the view that public corporations are little more than bundles of assets collectively owned by shareholders (principals) who hire directors and officers (agents) to manage those assets on their behalf.1 This principal-agent model, in turn, has given rise to two recurring themes in the literature: First, that the central economic problem addressed by corporation law is reducing "agency costs" by keeping directors and managers faithful to shareholders' interests; and second, that the primary goal of the public corporation is-or ought to be-maximizing shareholders' wealth. In this Article we take issue with both the prevailing principal-agent model of the public corporation and the shareholder wealth maximization goal that underlies it. Because corporations are fictional entities that can only act through human agents, problems of agent fealty are frequently encountered by those who study and practice corporate law. Yet the public corporation is hardly unique in its use of agents. Other organizational forms, including partnerships, proprietorships, privately-held corporations, and limited liability companies, also routinely do business through hired managers and employees. Thus, while the principal-agent problem may be important in understanding the business firm, we question whether it necessarily provides special insight into the theory of the public corporation. We explore an alternative approach that we believe may go much further in explaining both the distinctive legal doctrines that apply to public corporations and the unique role these business entities have come to play in American economic life: the team production approach. In the economic literature, team production problems are said to arise in situations where a productive activity requires the combined investment and coordinated effort of two or more individuals or groups.2 If the team members' investments are firm-specific (that is, difficult to recover once committed to the project), and if output from the enterprise is nonseparable (meaning that it is difficult to attribute any particular portion of the joint output to any particular member's contribution), serious problems can arise in determining how any economic surpluses generated by team production-any "rents"should be divided. Ex ante sharing rules invite shirking,3 while ex post attempts to divvy up rewards create incentives for opportunistic rent-seeking4 that can erode and even destroy the economic gains that flow from team production. Yet trying to prevent shirking and rent-seeking by defining individual team members' duties and rewards through explicit contracts can be impossibly difficult, especially when the team production process is complex, continuous, or uncertain. While team production problems are less well studied than principal-agent problems, we believe the former may represent a more appropriate basis for understanding the unique economic and legal functions served by the public corporation. Our analysis rests on the observation-generally accepted even by corporate scholars who adhere to the principal-agent model-that shareholders are not the only group that may provide specialized inputs into corporate production.5 Executives, rank-and-file employees, and even creditors or the local community may also make essential contributions and have an interest in an enterprise's success. And in circumstances where it is impossible to draft explicit contracts that deter shirking and rent-seeking among these various corporate "team members" by preallocating rewards and responsibilities, we suggest that the problem may be better left to an institutional substitute for explicit contracts: the law of public corporations. …

Stock Pyramids, Cross-Ownership, and the Dual Class Equity: The Creation and Agency Costs of Seperating Control from Cash Flow Rights

Abstract: This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. We describe the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, we analyze the consequences and agency costs of these arrangements. In particular, we show that they have the potential to create very large agency costs—costs that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies. The agency costs of these structures, we suggest, are also likely to exceed the agency costs of attending highly leveraged capital structures. Finally, we put forward an agenda for research concerning structures separating control from cash flow rights.

An empirical study on the determinants of the capital structure of Thai firms

Abstract: This study presents empirical evidence on the determinants of the capital structure of non-financial firms in 1996. Empirical results imply that the tax effect, the signaling effect, and the agency costs play a role in financing decisions. Ownership structure also effects financial policy. Single-family owned firms have significantly higher debt level. Only in single-family owned firms does managerial shareholdings have consistently positive influence on firm leverage. Finally large shareholders affect the debt ratio negatively, implying that they may monitor the management.

The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications

Abstract: Comparative research has shown that, even at the level of the largest firms, corporate ownership structure tends to be highly concentrated, with dispersed ownership structures characterizing only the Anglo/American context. What explains these national boundaries between dispersed and concentrated ownership structures? Earlier in this decade, several authors (most notably, Mark Roe) proposed "political" theories of corporate finance under which dispersed ownership was viewed as largely the result (in the U.S.) of regulatory constraints imposed on the development of financial intermediaries. Under this view, a deep-rooted American political ideology disfavored concentrated financial power, with the alleged result that the Berle/Means model of the firm (with its characteristic "separation of ownership and control") became dominant in the U.S. (but not elsewhere). More recently, economists working on the privatization of transitional economies have focused on the difficulties in establishing viable securities markets. Based on survey data, they have concluded that common law regimes vastly outperform civil law regimes in fostering the development of equity markets. Even if this research is still at a preliminary stage, this data suggests an alternative "legal" hypothesis for the observed dichotomy between concentrated and dispersed ownership: namely, only those legal systems that provide significant protections for minority shareholders can sustain active equity markets. This "legal" hypothesis is the mirror image of the earlier noted "political" theory of corporate finance: under the "legal" hypothesis, dispersed ownership evidences not the overregulation of institutional investors, but the law?s success in encouraging investors to accept the status of minority owners. Similarly, financial intermediaries fail to grow to the scale observed in Japan and Germany, because individuals do not need to rely upon them as collective investment vehicles. These two contrasting theories yield very different predictions about the likelihood that globalization will produce significant convergence in corporate governance. Emphasizing the inertial impact of path dependency, proponents of the former political theory have focused on the barriers to formal convergence and been skeptical of the prospects for legislative change. Proponents of the "legal" hypothesis have yet advanced no logical corollary to their arguments, but this article examines an alternative and more likely route to significance convergence in corporate governance: namely, functional convergence attained, first, through the migration of foreign issuers to the U.S. securities markets and, second, through international harmonization of securities regulation and disclosure standards. Empirically, the migration of foreign issuers to the U.S. markets has accelerated in this decade, and this article examines several hypotheses for this trend, including (i) the possibility that a U.S. listing is a bonding mechanism by which issuers assure minority shareholders that they will not be exploited; (2) the existence of network externalities associated with securities exchange that attract issuers even in the face of high regulatory costs; and (3) the possibility that the "strong" position of management in the Berle/Means corporate structure protects minority shareholders from the danger that the subsequent formation of a control block will permit a new controlling shareholder to expropriate value from them. Finally, this article argues that convergence in corporate governance will occur not at the level of corporate laws, but at the level of securities regulation. In particular, it emphasizes the critical, but often overlooked, role for securities regulation in reducing agency costs. In this regard, developments in the United States may foreshadow future international corporate convergence, as, it is argued, the predominance of federal securities law has largely overshadowed variations in state corporate laws and rendered unimportant the competition among American states for corporate charters. Similarly, on the international level, securities harmonization may trivialize path dependent variations in national law.

Managerial Ownership and Agency Conflicts: A Nonlinear Simultaneous Equation Analysis of Managerial Ownership, Risk Taking, Debt Policy, and Dividend Policy

Abstract: This paper uses a nonlinear simultaneous equation methodology to examine how managerial ownership relates to risk taking, debt policy, and dividend policy. The results have implications for our understanding of agency costs. We find risk to be a significant and positive determinant of the level of managerial ownership while managerial ownership is also a significant and positive determinant of the level of risk. The result supports the argument that managerial ownership helps to resolve the agency conflicts between external stockholders and managers but at the expense of exacerbating the agency conflict between stockholders and bondholders. We further observe evidence of substitution-monitoring effects between managerial ownership and debt policy, between managerial ownership and dividend policy, and between managerial ownership and institutional ownership. Copyright 1999 by MIT Press.

The Effects of Taxes, Agency Costs and Information Asymmetry on Earnings Management: A Comparison of Public and Private Firms

Abstract: The realization of security gains and losses to manage earnings in publicly-traded bank holding companies has been documented in a large number of studies, but very little is known about why managers engage in this behavior. Two possible explanations for earnings management put forth by Warfield, Wild, and Wild (1995) are that managers engage in this behavior either to circumvent accounting-based contracts designed to mitigate agency problems or to reduce information asymmetry. We compare public and private banks' security gain/loss realizations to determine how their earnings management differs. We find that public banks consistently engage in more earnings management than private banks and that the portion of their current period securities gains and losses realizations attributable to earnings management is more highly associated with next period's earnings before security gains and losses. These findings are consistent with earnings management occurring due to greater information asymmetry in public firms, and suggest that earnings management may not necessarily lead to the erosion in the quality of earnings suggested by Levitt (1988).

Political Preconditions To Separating Ownership from Corporate Control

Abstract: The large public firm dominates business in the United States despite its critical infirmities, namely the frequently fragile relations between stockholders and managers. Managers' agendas can differ from shareholders'; tying managers tightly to shareholders has been central to American corporate governance. But in other economically-advanced nations ownership is not diffuse but concentrated. It is concentrated in no small measure because the delicate threads that tie managers to shareholders in the public firm fray easily in common political environments, such as those in the continental European social democracies. Social democracies press managers to stabilize employment, press them to forego even some profit-maximizing risks with the firm, and press them to use up capital in place rather than to down-size when markets no longer are aligned with firm's production capabilities. Since managers must have discretion in the public firm, how they use that discretion is crucial to stockholders, and social democratic pressures on managers induce them to stray from their shareholders' preference to maximize profits. Moreover, the means that align managers with diffuse stockholders in the United States--incentive compensation, transparent accounting, hostile takeovers, and strong shareholder-wealth maximization norms--are harder to implement in continental social democracies. Hence, public firms in social democracies will, all else equal, have higher managerial agency costs, and large-block shareholding will persist as shareholders' next best remaining way to control those costs. Indeed, when we line up the world's richest nations on a left-right continuum and then line them up on a close to diffuse ownership continuum, the two correlate powerfully. True, the effects on total social welfare are ambiguous; social democracies may enhance total social welfare, but if they do, they do so with fewer public firms than less socially-responsive nations. We thus uncover not only a political explanation for ownership concentration in Europe, but also a crucial political prerequisite to the rise of the public firm in the United States, namely the absence of a strong social democracy and the concomitant political pressures it would have put on the American business firm.

The Effects of Taxes, Agency Costs and Information Asymmetry on Earnings Management: A Comparison of Public and Private Firms

Abstract: The realization of securities gains and losses to manage earnings in publicly-traded bank holding companies has been documented in a large number of studies, but very little is known about why managers engage in this behavior. Two possible explanations for earnings management put forth by Warfield, Wild, and Wild (1995) are that managers engage in this behavior either to circumvent accounting-based contracts designed to mitigate agency problems, or to reduce information asymmetry. We compare public and private banks' realizations of securities gains and losses to determine how their earnings management differs. We find that public banks consistently engage in more earnings management than private banks, and that the portion of their current period securities gains and losses attributable to earnings management is more positively associated with next period's earnings before securities gains and losses. These findings are consistent with earnings management occurring due to greater information asymmetry in public firms, and suggest that earnings management may not necessarily lead to the erosion in the quality of earnings suggested by Levitt (1998).

Agency cost, market risk, investment opportunities and dividend policy – an international perspective

Abstract: Reviews previous research on dividend policy, most of which is US‐based, and presents a worldwide study of the relationship between dividend payout, agency costs, market risk and investment opportunities. Finds that the dividend payout ratio is significantly negatively related to institutional ownership of a firm’s shares (i.e. agency costs) and its beta value (i.e. market risk) but independent of investment decisions. Discusses consistency with other research, recognizes that other factors are also likely to influence dividend policy and calls for further research.

Exit, Voice, and the Role of Corporate Directors: Evidence from Acquisition Performance

Abstract: This study examines the characteristics of corporate boards for 82 companies that attempted 106 acquisitions during the 1980s. We find that poor performance is more likely to occur in firms that have recently experienced higher turnover of outside and lower turnover of inside directors. Companies with smaller boards, more reputable members, and larger equity holdings also outperform their counterparts. Our results suggest that outside directors resign from the board instead of challenging managerial shirking. We conclude that choosing directors for whom board exit is costly will better reduce agency costs.

Why Firms Diversify: An Empirical Examination

Abstract: There is substantial evidence that the market placed a lower value on diversified than specialized firms during the 1980's (Lang and Stulz (1994) and Berger and Ofek (1995)). However, many firms diversified anyway. This paper addresses the question, "Why do firms diversify in the first place?" I use the Compustat segment tapes to investigate firms which are specialized and then become diversified. I find that not all segment changes represent economic events. I test the hypothesis that firms diversify due to agency costs between managers and shareholders. Looking at managerial ownership I do not find evidence of agency costs but it is possible that managerial ownership is not a good indicator of agency costs. I test the hypothesis that diversifying firms may be primarily in low growth industries and reject this hypothesis. I find evidence that diversifying firms have slightly worse financial performance than their specialized counterparts. They have free cash available to diversify or more likely have built up their cash balance to make an acquisition. The most significant explanation I find for firm diversification is that diversifying firms have not engaged in as much research and development as their non-diversifying counterparts. In order to grow or perhaps even maintain their current status, they must buy growth in areas outside of their current operations.

Executive Ownership and Control in Newly Public Firms: The Role of Venture Capitalists *

Abstract: We study the implications of CEO equity ownership for incentives and control in a sample of 1,011 newly public firms. Before an initial public offering, equity investments by venture capitalists reduce CEO ownership by about half, from an average of 35 percent to 19 percent. Venture capitalists narrow this difference by granting options, reducing secondary sales, and lowering the dilution by primary shares, but a gap in post-IPO CEO equity ownership remains. The effect of this lower ownership on incentives depends upon the measure employed - the dollar sensitivity of CEO pay to firm value is lower in venture firms, but the elasticity is about the same. In addition, we present evidence that lower ownership, combined with concentrated outside holdings, leads to a reduction in the agency costs of managerial control. We conclude that the patterns of ownership in part represent a tradeoff by venture capitalists between the benefits of incentives and the agency costs of control.

Stock Pyramids, Cross-Ownership, and the Dual Class Equity: The Creation and Agency Costs of Seperating Control from Cash Flow Rights

Abstract: This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. We describe the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, we analyze the consequences and agency costs of these arrangements. In particular, we show that they have the potential to create very large agency costs -- costs that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies. The agency costs of these structures, we suggest, are also likely to exceed the agency costs of attending highly leveraged capital structures. Finally, we put forward an agenda for research concerning structures separating control from cash flow rights.

The Utilization of Value-Based Management: An Empirical Analysis

Abstract: The objective of this paper is to provide information on how value-based management is perceived, implemented, and utilized in leading industrial corporations in the US, and to examine factors that influence the decision to utilize it. We gather data through a survey of the chief financial officers (CFOs) of a large sample of US industrial corporations, in order to ascertain their opinions of and experiences with value-based management systems and metrics. The results suggest that there is room for improvement in the design and implementation of value-based management systems. If value-based management is to have an impact on corporate strategy and value and reduce intra-firm agency costs, then its scope within the firm may need to be expanded.

Organizational Form in the Property-Liability Insurance Industry

Abstract: INTRODUCTION Recent research has argued that alternative organizational forms will coexist in an industry because of differential relative advantages. (See, for example, Jensen and Meckling, 1976; Klein, Crawford, and Alchian, 1978; Fama and Jensen, 1983; Williamson, 1985.) The two important elements of organizational form are the ownership structure of the firm, and the degree to which the firm internalizes or outsources production, that is, the level of vertical integration. The property-liability insurance industry is characterized by firms that differ on both of these dimensions of organizational form. The range of ownership structures includes stock corporations, mutuals, and reciprocal organizations. Stockholder-owned insurers dominate the market, with 67.7 percent share of premiums written in 1994. Stock insurers controlled 55 percent of the personal lines market, which includes auto and homeowners insurance, but held a commanding lead in commercial lines, with a 79 percent share. Property-liability insurance firms also vary widely in the degree of vertical integration of the distribution system, with some firms using exclusive dealing arrangements and others contracting the sales function to independent agents who have ownership rights in the client list and who can represent a number of competing insurers. Independent agency insurers controlled 52 percent of the total market in 1994, and 71.8 percent of the commercial lines market.(1) The organizational form literature in property-liability insurance has largely treated ownership and distribution system choice separately. However, some overlap exists between the theory and empirical predictions across the ownership form and distribution system literature. For example, Mayers and Smith (1988) argue that stock insurers should be associated with a more complex mix of business than mutual insurers while Cummins and Weiss (1992), Regan and Tennyson (1996), and Regan (1997) argue that independent agency insurers should be preferred to exclusive dealers when complexity is higher. It is difficult to separate these effects empirically. An exception to treating these elements of organizational form as independent is Kim, Mayers, and Smith (1996), who argue that stock ownership and independent agency distribution are strategic complements, because independent agency is an effective device for minimizing agency costs that arise between owners and policyholders in a stock firm. Therefore, stockholder-owned insurers should choose independent agency distribution rather than exclusive dealing arrangements to minimize agency costs. While the authors of this article agree that independent agency distribution and stock ownership forms are likely to be strategic complements, the reasoning differs from that of Kim, Mayers, and Smith. An alternate explanation for the observed correlation between stock ownership form and independent agency distribution is that each of these elements offers advantages in certain lines of business and underwriting environments. In particular, the authors test the hypothesis that both stock ownership and independent agency distribution are more suited to complex lines of business and underwriting environments characterized by more risk than other combinations of ownership form and distribution system. Thus, rather than stockholder-owned firms choosing independent agency distribution, firms might first choose a business strategy, and then jointly choose ownership form and distribution system. The theory that supports this hypothesis is reviewed below. Several tests of the hypothesis are then presented. The direct correlation between ownership form and distribution system across lines of business is first measured using independence tests. Then, the authors compare the allocation of aggregate underwriting capacity to risky and complex lines of business between stock and non-stock insurers, and between independent agency and exclusive dealing insurers. …

Globalization of Equity Markets and the Cost of Capital

Abstract: This paper examines the impact of globalization on the cost of equity capital. We argue that the cost of equity capital decreases because of globalization for two important reasons. First, the expected return that investors require to invest in equity to compensate them for the risk they bear generally falls. Second, the agency costs which make it harder and more expensive for firms to raise funds become less important. The existing empirical evidence is consistent with the theoretical prediction that globalization decreases the cost of capital, but the documented effects are lower than theory leads us to expect. We discuss various reasons for why this is the case.

Coordination of Earnings, Regulatory Capital and Taxes in Private and Public Companies

Abstract: This study investigates whether the form of ownership in the life insurance industry (i.e., public, private or mutual) affects the pursuit of capital, earnings, and tax management goals between 1975 and 1991. Results indicate that differences resulting from ownership structure are most pronounced in the area of tax planning. Private stock companies use both policy reserves and reinsurance to manage taxes while public companies, on average, do not appear to manage taxes. I investigate whether the tax planning differences observed appear to be induced by compensation schemes used to control agency costs in public firms, or concerns with stock market interpretations, by studying the tax planning behavior of mutual firms. These firms have diffuse ownership structures, similar to those of public companies, and thus face similar agency problems. But since mutual firms are owned by their policyholders, they are not subject to the stock market concerns that affect public companies. If both private stock and mutual firms manage taxes more aggressively than public companies, the inference is that stock market concerns create the behavioral differences. However, if only private stock companies are aggressive tax managers, differences are more likely to stem from agency costs. My results indicate that mutual firms, like public companies, do not, on average, manage taxes. This outcome is consistent with incentive compensation contracts, designed to control agency costs, at least partly inducing differences in tax management behavior between private and public stock companies. I find support for capital management in all ownership structures. However, the specific tools employed vary across firm type. Private stock companies are more likely to manage capital through adjusting dividends while public companies and mutual firms are more likely to vary reinsurance levels. Mutual firms also used realized gains and losses to manage capital. All firm types appear to use policy reserves and reinsurance to smooth earnings.

Using Ownership as an Incentive: Does the "Too Many Chiefs" Rule Apply in Entrepreneurial Firms?

Abstract: Agency theory is used to develop hypotheses regarding the effects of ownership proliferation on firm performance. The authors examine the effects of chief executive officer (CEO) ownership, executive team ownership, and all employee ownership in addition to the moderating effect of risk on firm survival and stock price. Firms with low CEO ownership outperform those with high levels of CEO ownership across all levels of risk, but the effect is most pronounced for low-risk firms. Executive team ownership is negatively related to firm performance, whereas ownership for all employees is positively associated with firm performance, particularly for higher risk firms. Agency theory assumes that the organizational form with the lowest agency costs is one in which the leader (chief executive officer (CEO) or president) owns 100% of the company; in this case, the top executive is also the princi- pal (owner). When the top executive is not the sole owner, then that individual becomes an agent (employee) of the firm, at which point agency problems begin to arise. Agency problems are said to occur when agents pursue indi- vidual goals that are not necessarily consistent with those of the organization. In addition, agency problems arise because risk preferences of agents are dif- ferent from those of the principal, resulting in employee decision making that An earlier version of this article was presented at the 1996 Babson-Kauffman Entrepreneurship Research Conference and was published in the proceedingsFrontiers of Entrepreneurship Research in 1996. Funding for this research was provided by the Center for Advanced Human Resource Studies and the Entrepreneurship and Personal Enterprise Program at Cornell Uni - versity. The reviewers wish to thank the following individuals for their helpful comments on ear - lier versions of the manuscript: Alice Andrews, John Boudreau, Edward Zajac, Cornell ILR Human Resource Studies seminar participants, and the anonymous reviewers and editor of Group and Organization Management.

The economics of executive compensation

Abstract: Part 1 Theoretical foundations of executive pay: theory of the firm - managerial behaviour, agency costs and ownership structure, Michael C. Jensen, William H. Meckling moral hazard and observability, Bengt Holmstrom agency problems and theory of the firm, Eugene F. Fama rank-order tournaments as optimum labour contracts, Edward P. Lazear, Sherwin Rosen moral hazard in teams, Bengt Holmstrom authority, control, and the distribution of earnings, sherwin Rosen an analysis of the principal-agent problem, Sanford J. Grossman, Oliver D. Hart. Part 2 Executive compensation and company performance: managerial pay and corporate performance, Wilbur G. Lewellen, Blaine Huntsman corporate performance and managerial remuneration - an empirical analysis, Kevin J. Murphy executive compensation, management turnover, and firm performance - an empirical investigation, Anne T. Coughlan, Ronald M. Schmidt performance pay and top-management incentives, Michael C. Jensen, Kevin J. Murphy contracts and the market for executives, Sherwin Rosen risk aversion, performance pay, and the principal-agent problem, Joseph G. Haubrich. Part 3 Relative performance measures: an empirical investigation of the relative performance evaluation of corporate executives, Rick Antle, Abbie Smith relative performance evaluation of chief executive officers, Robert Gibbons, Kevin J. Murphy. Part 4 Determinants of executive compensation: incentives, learning, and compensation - a theoretical and empirical investigation of managerial labour contracts, Kevin J. Murphy executive compensation and executive incentive problems - an empirical analysis, wilbur Lewellen et al CEO compensation as tournament and social comparison - a tale of two theories, Charles A. O'Reilly et al executive pay and firm performance, Jonathan s. Leonard portfolio considerations in valuing executive compensation, Richard A. Lambert et al optimal incentive contracts in the presence of career concerns - theory and evidence, Robert Gibbons, Kevin J. Murphy do corporations award CEO stock options effectively? David Yermack. Part 5 The effects of CEO pay: executive motivations, earnings, and consequent equity performance, Robert Tempest Masson the impact of long-range managerial compensation plans on shareholders, James A. Brickley et al market reaction to short-term executive compensation plan adoption, Hassan Tehranian, James F. Waegelein managerial incentives and corporate investment and financing decisions, Anup Agrawal, Gershon N. Mandelker does performance-based managerial compensation affect corporate performance? John M. Abowd. (part contents).

A New Governance Structure for Corporate Bonds

Abstract: This article proposes a new governance structure for publicly issued corporate bonds. Ownership of public bonds is bothfluid and dispersed Fluidity and dispersion generate benefits: They increase the liquidity of public bonds and make their risk more easily diversifiable. By the same token, however, fluidity generates a bonding problem and dispersion generates a collective action problem. In the context of public bonds, these problems increase the agency cost of debt and thus lower the overall value of the company. Private debt, the ownership of which is neither fluid nor dispersed, lacks easy diversification and liquidity, but also entails lower agency cost of debt. The new governance structure Professors Yakov Amihud, Kenneth Garbade, and Marcel Kahan propose is designed to overcome the collective action and bonding problems while retaining the easy diversifiability and liquidity associated with public bonds. The centerpiece of this structure is a new type of bondholder representative, the supertrustee. In contrast to the conventional indenture trustee, the supertrustee will be given the authority and the incentives to monitor the company actively, as well as to enforce and, where appropriate, to renegotiate a bond's covenants on behalf of public bondholders. Because the supertrustee is a single entity, and because the company will have some power over who is appointed as supertrustee, this structure resolves the collective action and bonding problems presently associated with dispersed andfluid ownership of public debt. At the same time, because public bond indentures will contain covenants similar to those presently contained in private debt, agency costs are reduced

Theory and Evidence on the Relationship Between Ownership Structure and Capital Structure

Abstract: Agency theory embeds the influential relationship that exist between managers and shareholders of firms. This relationship has the potential to influence decision-making in the firm which in turn has potential impacts on firm characteristics such as firm value. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by proposing a further link between ownership structure and capital structure. Using an agency framework we argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage. The paper tests four hypotheses that explore various aspects of this relationship. The empirical results provide support for a positive relationship between external blockholders and leverage, a curvilinear relationship between the level of managerial share ownership and leverage and finally, the results suggest that the relationship between external block ownership and leverage varies across the level of managerial share ownership. These results parallel and are consistent with the active monitoring hypothesis, convergence-of-interests and the entrenchment hypotheses which have been proposed in a different context.

Corporate Leadership Structure: On The Separation of the Positions of CEO and Chairman of the Board

Abstract: Shareholders activists and regulators are pressuring US firms to separate the titles of CEO and Chairman of the Board They argue that separating the titles will reduce agency costs in corporations as well as potentials benefits Our empirical evidence provides preliminary support for the hypothesis that the costs of separation are larger than the benefits for most firms Our results also call into question previous empirical work which suggests that firms with separate titles outperform firms with combined titles We tentatively conclude that proponents of legislation to force separation of titles have overlooked important costs

Contractual structure in agriculture

Abstract: This paper develops a generalized double-sided moral hazard model of contract choice in agricultural production, with mutual monitoring of each other by the landlord and the tiller, who generally have different levels of farming efficiency and are risk-averse. Using this model, we formally prove that the optimal contract maximizes the output net of the risk-bearing and agency costs, of both the parties and carry out a simulation exercise which helps explain many of the tenancy-related issues. The difference in the farming efficiency of the two sides, often ignored in previous analysis, turns out to be the principal determinant of the contract offered to a tiller.

Agency Costs, Firm Behaviour, and the Nature of Competition

Abstract: This paper develops an agency model in which firms can influence their own incentives to provide a non-contractible effort by contracting on other variables (e.g. by committing themselves to some verifiable investment). In such a model the firms' need for outside finance is shown to interact with their product market behavior in a non-monotonic way; for low levels of outside finance a rise in the need for outside finance reduces the manager's incentive to provide effort; but for high initial levels of outside finance a rise in the need for outside finance requires a commitment to higher effort which in turn is achieved through the contractible investment variables. This non-monotonicity has major implications for firm behavior, both when responding to demand shocks or when reacting to a change in the competitive environment.