Showing papers on "Agency cost published in 2003"

Executive Compensation as an Agency Problem

Abstract: This paper provides an overview of the main theoretical elements and empirical underpinnings of a managerial power approach to executive compensation. Under this approach, the design of executive compensation is viewed not only as an instrument for addressing the agency problem between managers and shareholders but also as part of the agency problem itself. Boards of publicly traded companies with dispersed ownership, we argue, cannot be expected to bargain at arm's length with managers. As a result, managers wield substantial influence over their own pay arrangements, and they have an interest in reducing the saliency of the amount of their pay and the extent to which that pay is de-coupled from managers' performance. We show that the managerial power approach can explain many features of the executive compensation landscape, including ones that many researchers have long viewed as puzzling. Among other things, we discuss option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, the use of compensation consultants, and the observed relationship between CEO power and pay. We also explain how managerial influence might lead to substantially inefficient arrangements that produce weak or even perverse incentives.

Equity Ownership and Firm Value in Emerging Markets

Abstract: This paper investigates whether management stock ownership and large non-management blockholder share ownership are related to firm value across a sample of 1433 firms from 18 emerging markets. When a management group's control rights exceed its cash flow rights, I find that firm values are lower. I also find that large non-management control rights blockholdings are positively related to firm value. Both of these effects are significantly more pronounced in countries with low shareholder protection. One interpretation of these results is that external shareholder protection mechanisms play a role in restraining managerial agency costs and that large non-management blockholders can act as a partial substitute for missing institutional governance mechanisms.

Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors*

Abstract: This article provides evidence linking corporate governance mechanisms to higher bond ratings and lower bond yields. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. We find firms that have greater institutional ownership and stronger outside control of the board enjoy lower bond yields and higher ratings on their new bond issues. However, concentrated institutional ownership has an adverse effect on yields and ratings. These results are robust to a specification that controls for institutional ownership being influenced by bond yields.

Corporate Governance in Asia: A Survey

Abstract: Corporate governance has received much attention in recent years, partly due to the Asian financial crisis. We review the literature on corporate governance issues in Asia to develop region-specific and general lessons. Much attention has been given to poor corporate sector performance, but most studies do not suggest Asian firms were badly run. The literature does confirm the limited protection of minority rights in Asia, allowing controlling shareholders to expropriate minority shareholders. Agency problems have been exacerbated by low corporate transparency associated with rent-seeking and relationship-based transactions, extensive group structures and diversification, and risky financial structures. The controlling shareholder bears some of agency costs in the form of share price discounts and expenditures on monitoring, bonding and reputation building. The Asian financial crisis further showed that conventional and alternative corporate governance mechanisms can have limited effectiveness in systems with weak institutions and poor property rights. Overall, the understanding of the determinants of firm organizational structures, corporate governance practices and outcomes remains limited, however.

Agency costs, ownership structure and corporate governance mechanisms

Abstract: In this paper, we extend the work of Ang et al. [J. Finance 55 (1999) 81] to large firms. We find that managerial ownership is positively related to asset utilization but does not serve as a significant deterrent to excessive discretionary expenses. Outside block ownership may only have a limited effect on reducing agency costs. Furthermore, smaller boards serve the same role, but independent outsiders on a board do not appear to protect the firm from agency costs. Thus, this paper reports complementary evidence to Ang, Cole and Lin. In large publicly traded corporations, managerial ownership significantly alleviates principal–agent conflicts even in the presence of other agency deterrent mechanisms.

Agency Costs of Controlling Minority Shareholders

Abstract: Agency Costs of Controlling Minority Shareholders (coauthored with Henrik Cronqvist) estimates the agency costs of controlling minority shareholders (CMSs) using a panel of Swedish listed firms. CMSs are owners who have a control stake of the firm’s votes while owning only a minority fraction of the firm’s equity. The study documents that families in control are almost exclusively CMSs through an extensive use of dual-class shares. The results show that increased ownership of votes by a controlling owner is associated with an economically and statistically significant decrease in firm value, but that the decrease in firm value is significantly larger for firms with family CMSs than for firms with financial institutions or corporations in control. This indicates that the agency costs of family CMSs are larger than the agency costs of other controlling owners.Family Ownership, Control Considerations, and Corporate Financing Decisions: An Empirical Analysis analyzes the relation between concentrated family control and firms’ choice of capital structure for a panel of Swedish listed firms. The results suggest that the capital structure choices made by firms with families in control are influenced by the controlling families’ desire to protect their control, and that the resulting capital structures are likely to increase the agency costs of family control. The Choice between Rights Offerings and Private Equity Placements (coauthored with Henrik Cronqvist) analyzes the determinants of the choice between rights offerings and private equity placements using a sample of rights offerings and private placements made by listed Swedish firms. The results indicate that control considerations explain why firms make uninsured rights offerings. The evidence also suggest that private placements, and to some extent underwritten rights offerings, are made by potentially undervalued firms in order to overcome underinvestment problems resulting from asymmetric information about firm value. Furthermore, private placements are frequently made in conjunction with the establishment of a product market relationship between purchaser and seller, which is consistent with equity ownership reducing contracting costs in new product market relationships. Why Agency Costs Explain Diversification Discounts (coauthored with Henrik Cronqvist and Peter Hogfeldt) studies diversification within the real estate industry, in which firms can diversify over property types and geographical regions. Similar to previous studies, this essay documents the existence of a diversification discount. However, the major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue non-focusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, and are predominantly family controlled. The ex ante diversification discount is, therefore, a measure of agency costs. The Difference in Acquirer Returns between Takeovers of Public Targets and Takeovers of Private Targets shows, for a sample of Swedish takeovers, that the average acquirer abnormal return is positive and significant when the target firm is privately held but insignificant when the target firm is listed on a stock exchange. These results are robust when controlling for sample selection problems and other variables capable of explaining acquirer returns. The evidence is consistent with greater acquirer bargaining power and resolution of information asymmetries in takeovers of private targets.

Executive Equity Compensation and Incentives: A Survey

Abstract: 1. INTRODUCTION Corporate governance is generally considered to be the set of complementary mechanisms that help align the actions and choices of managers with the interests of shareholders. Monitoring actions by the board of directors, debtholders, or institutional blockholders can have an important impact on the economic performance of an organization (for example, Jensen [1989], Mehran [1995], Core, Holthausen, and Larcker [1999], and Holderness [2003]). Another important and often debated component of the governance structure is the compensation contract selected for providing remuneration to managers (for example, the level of remuneration or choice of performance measures). Executive compensation has been the subject of extensive prior research, and excellent general reviews already exist for the interested reader (for example, Murphy [1999]). For our purposes here, we will not reproduce this discussion but rather focus on the more narrow, but crucial, topic of stock-based compensation and incentives. Stock and option compensation and the level of managerial equity incentives are aspects of corporate governance that are especially controversial to shareholders, institutional activists, and governmental regulators. Similar to much of the corporate finance and corporate governance literature, research on stock-based compensation and incentives has generated not only useful insights, but also has produced many contradictory findings. Not surprisingly, many fundamental questions remain unanswered, and one of our goals is to highlight topics that seem especially appropriate for future research. Within the corporate governance literature, and more specifically within the executive compensation literature, there are alternative views on the efficiency of observed contracting arrangements between firms and their executives. For the purposes of this survey and as an organizing principle of our literature review, we follow a traditional agency-theory framework and define an efficient contract as one that maximizes the net expected economic value to shareholders after transaction costs (such as contracting costs) and payments to employees. An equivalent way of saying this is that we assume that contracts minimize agency costs. Clearly, the types of contracts that are efficient at any particular time or in a particular sector of the economy are a function of various transaction costs. For instance, a contract that was efficient in the United States fifty years ago may not be efficient today because information costs have fallen greatly and the optimal organizational form has changed as a result. Over time, optimal contracting arrangements evolve with changes in contracting technology. As part of this evolutionary process, firms are experimenting with new contracting technologies. Some experiments succeed and others fail as firms update their beliefs and learn about the efficiency of their governance structures. Throughout this process, firms may be uncertain about the optimal contracting technology. As a result of this uncertainty and because of differences in beliefs about optimal incentive levels, one would expect variation in the observed contracts across firms. However, unless beliefs are systematically biased, we expect that compensation contracts are efficient, on average, and that average equity incentive levels across firms are neither "too high" nor "too low." (For an example and discussion of how an evolutionary process converges to an efficient outcome, see Lazear [1995, pp. 8-10].) In contrast to this economic perspective, a number of scholars and practitioners either implicitly or explicitly take the view that contracting arrangements are largely inefficient and do not minimize agency costs (for example, Morck, Shleifer, and Vishny [1988], Crystal [1991], and Jensen [1993]). A view that sees most firms behaving inefficiently is hard to support. At the opposite extreme is the view that transaction costs in the labor market, the stock market, and the market for corporate control are so small that all agency costs are eliminated. …

Corporate Governance and Expected Stock Returns: Evidence from Germany

Abstract: Recent empirical work shows that a better legal environment leads to lower expected rates of return in an international cross-section of countries. This paper investigates whether differences in firm-specific corporate governance also help to explain expected returns in a cross-section of firms within a single jurisdiction. Constructing a corporate governance rating (CGR) for German firms, we document a positive relationship between the CGR and firm value. In addition, there is strong evidence that expected returns are negatively correlated with the CGR, if dividend yields and price-earnings ratios are used as proxies for the cost of capital. Most results are robust for endogeneity, with causation running from corporate governance practices to firm fundamentals. Finally, an investment strategy that bought high-CGR firms and shorted low-CGR firms would have earned abnormal returns of around 12 percent on an annual basis during the sample period. We rationalize the empirical evidence with lower agency costs and/or the removal of certain governance malfunctions for the high-CGR firms.

Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment

Abstract: This paper investigates the relationship between dividends and the ownership and control structure of the firm. For a panel of Austrian firms over the 1991/99 period, we find that state-controlled firms engage in dividend smoothing, while family-controlled firms do not. The latter choose significantly lower target payout levels. Consistently, state-controlled firms are most reluctant and family-controlled firms are least reluctant to cut dividends when cuts are warranted. The dividend behavior of bank- and foreign-controlled firms lies in between state- and family-controlled firms. This is consistent with the expected “ranking” of information asymmetries and managerial agency costs. The above results hold for firms with good investment opportunities. We find that firms with low growth opportunities optimally disgorge cash irrespective of who controls the firm.

A Survey of Blockholders and Corporate Control

Abstract: 1. INTRODUCTION The notion of diffuse stock ownership is well entrenched among economists. It started with Adam Smith's legendary warning in Wealth of Nations about the "negligence and profusion" that will result when those who manage enterprises are "rather of other people's money than of their own." A century and a half later, another lawyer, Adolf Berle, along with a journalist, Gardiner Means, returned to the theme of diffuse stock ownership. Since the dawn of capitalism, Berle and Means reasoned, most production had taken place in relatively small organizations in which the owners were also the managers. Beginning in the nineteenth century with the Industrial Revolution, however, technological change had increased the optimal size of many firms to the point where no individual, family, or group of managers would have sufficient wealth to own a controlling interest. As a result, enterprises faced "the dissolution of the old atom of ownership into its component parts, control and beneficial ownership" (Berle and Means 1932, p. 8). Ultimately, this separation of ownership from control threatens "the very foundation on which the economic order of the past three centuries has rested." The arguments of Berle and Means on the dangers of diffuse stock ownership, written during the depths of the Great Depression, had an immediate and profound impact. (1) Most notably, their arguments helped to shape the federal securities legislation of the 1930s. That legislation was intended to protect diffuse shareholders from professional managers, and it remains the primary federal securities law to this day. The notion of diffuse ownership has also had a profound influence on contemporary economists. This can perhaps best be seen in one of the pivotal papers of the postwar era, Jensen and Meckling's (1976) agency paper. Much of the focus of that paper is on the conflict between diffuse shareholders and professional managers: Since the relationship between the stockholders and manager of a corporation fit the definition of a pure agency relationship, it should be no surprise to discover that the issues associated with the "separation of ownership and control" in the modern diffuse ownership corporation are intimately associated with the general problem of agency. We show ... that an explanation of why and how the agency costs generated by the corporate form are born leads to a theory of the ownership (or capital) structure of the firm. As economists started to employ this agency perspective, it was mainly in the context of diffuse shareholders and professional managers. This, for example, can be seen in the papers in a special issue of the Journal of Financial Economics on the market for corporate control in 1983. Many of these papers have become widely cited. It is illuminating, however, that among the sixteen papers in the special issue, there is little mention of large-percentage shareholders or managerial stock ownership. (2) In the issue's review article (Jensen and Ruback 1983), stock ownership, be it by mangers or by outsiders, was not listed as a direction for future research. After the volume was published, researchers began to discover that some public corporations had large-percentage shareholders, many of whom were top managers or directors. Researchers also discovered that some of these corporations were large and well known. Concentrated stock ownership, it appeared, was not limited to a few anomalous firms. Soon, academics began to study the impact of large-block shareholders. Three empirical papers in the mid-1980s set the tone and the agenda for much of the research into ownership structure that has ensued over the following fifteen years. Demsetz and Lehn (1985) address the question of the types of public corporations that are likely to have high levels of managerial stock ownership. Holderness and Sheehan (1988) address the question of whether major corporate decisions are different when a corporation has a large-percentage shareholder. …

Financing of corporations

Abstract: This review evaluates the four major theories of corporate financing: (1) the Modigliani–Miller theory of capital-structure irrelevance, in which firm values and real investment decisions are unaffected by financing; (2) the trade-off theory, in which firms balance the tax advantages of borrowing against the costs of financial distress; (3) agency theories, in which financing responds to managers’ personal incentives; and (4) the pecking-order theory, in which financing adapts to mitigate problems created by differences in information. These theories are conditional, not general. It is easy to find examples of each theory at work, but otherwise difficult to distinguish the theories empirically. Large, safe firms with mostly tangible assets tend to borrow more. Firms with high profitability and valuable growth opportunities tend to borrow less. Each of these tendencies is consistent with two or more of the major theories of financing. It may be possible to devise sharper tests by exporting the theories to developing economies, where agency and information problems are more severe. Further progress in understanding corporate financing decisions will require a deeper understanding of agency issues when value-maximizing operating and investment decisions cannot be observed or verified. But managers are not just temporary agents motivated by immediate pecuniary compensation or perquisites. Managers specialize their human capital to the firm. Some recent research suggests how financing can support the co-investment of human and financial capital.

Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law

Abstract: Corporate law scholars have long debated whether state competition for corporate charters is a "race for the bottom" or a "race for the top." This paper offers an analysis of the dynamics and performance of state charter competition. I show how the presence of managerial opportunism and externalities may lead states to adopt undesirable corporate law rules. The analysis identifies the various issues with respect to which state competition is likely to fail, and he advocates an expansion of federal regulation to govern all of these issues. I also connect the state competition question with the question of contractual freedom in corporate law and argue that many scholars should reconsider their inconsistent views regarding these two questions. Finally, I conclude by addressing potential objections to the expansion of federal corporate regulation.

Executive compensation and agency costs in Germany

Abstract: With the growth of international mergers like DaimlerChrysler, interest in executive compensation practices abroad, particularly in Germany, has increased. Using unique data sources for Germany, we find that similar to US firms, German firms also have agency problems caused by the separation of ownership from control, with ownership dispersion leading to higher compensation. In addition, there is evidence that bank influence has a negative impact on compensation.

Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash

Abstract: Managers make different decisions in countries with poor protection of investor rights and poor financial development One possible explanation is that shareholder-wealth maximizing managers face different tradeoffs in such countries (the tradeoff theory) Alternatively, firms in such countries are less likely to be managed for the benefit of shareholders because the poor protection of investor rights makes it easier for management and controlling shareholders to appropriate corporate resources for their own benefit (the agency costs theory) Holdings of liquid assets by firms across countries are consistent with Keynes' transaction and precautionary demand for money theories Firms in countries with greater GDP per capita hold more cash as predicted Controlling for economic development, firms in countries with more risk and with poor protection of investor rights hold more cash The tradeoff theory and the agency costs theory can both explain holdings of liquid assets across countries However, the fact that a dollar of cash is worth less than $065 to the minority shareholders of firms in such countries but worth approximately $1 in countries with good protection of investor rights and high financial development is only consistent with the agency costs theory

CEO turnover in insider-dominated boards: The Italian case

Abstract: We investigate CEO turnover in relationship to performance, ownership concentration and CEO ownership in a sample of 60 private companies listed on the Italian Stock Exchanges over the 9-year period 1988–1996 Concentrated ownership, family control, limited institutional investors activism, and lack of main bank monitoring make Italy a corporate governance environment dominated by insiders As a result, boards of directors are dominated by insiders and/or represent the interests of the controlling shareholders Our main finding is that CEO turnover is negatively related to firm performance also in this environment, but this relationship holds only if the controlling shareholder is not the CEO Our findings suggest that insiders with large stakes monitor and replace under-performing outside CEOs The paper offers positive empirical evidence that non-CEO controlling shareholders are a governance mechanism that provides a substitute for outside members on boards of directors in lowering agency costs When the CEO is an owner, however, we have all the negative aspects of insider-dominated boards

Controlling Controlling Shareholders

Abstract: The rules governing controlling shareholders sit at the intersection of the two facets of the agency problem at the core of public corporations law. The first is the familiar principal-agency problem that arises from the separation of ownership and control. With only this facet in mind, a large shareholder may better police management than the standard panoply of market-oriented techniques. The second is the agency problem that arises between controlling and non-controlling shareholders, which produces the potential for private benefits of control. There is, however, a point of tangency between these facets. Because there are costs associated with holding a concentrated position and with exercising the monitoring function, some private benefits of control may be necessary to induce a party to play that role. Thus, from the point of view of public shareholders, the two facets of the agency problem present a tradeoff. The presence of a controlling shareholder reduces the managerial agency problem, but at the cost of the private benefits agency problem. Non-controlling shareholders will prefer the presence of a controlling shareholder so long as the benefits from reduction in managerial agency costs are greater than the costs of private benefits of control. The terms of this tradeoff are determined by the origami of judicial doctrines that describe the fiduciary obligations of a controlling shareholder. In this article, we examine the doctrinal limits on the private benefits of control from a particular orientation. A controlling shareholder may extract private benefits of control in one of three ways: by taking a disproportionate amount of the corporation's ongoing earnings; by freezing out the minority; or by selling control. Our thesis is that the limits on these three methods of extraction must be symmetrical because they are in substantial respects substitutes. We then consider a series of recent Delaware Chancery Court decisions that we argue point in inconsistent directions: on the one hand reducing the extent to which a controlling shareholder can extract private benefits through selling control, and on the other increasing the extent to which private benefits can be extracted through freezing out non-controlling shareholders. While judicial doctrine is too coarse a tool to specify the perfect level of private benefits, we believe these cases get it backwards - the potential for efficiency gains are greater from sale of control than from freeze outs, so that a shift that favors freeze outs as opposed to sales of control is a move in the wrong direction. In particular we argue that the Delaware law of freeze outs can be best reunified by giving "business judgment rule" protection to a transaction that is approved by a genuinely independent special committee that has the power to "say no" to a freeze out merger, while also preserving what amounts to a class-based appraisal remedy for transactions that proceed by freeze out tender offer without a special committee approval.

Controlling Controlling Shareholders

Abstract: The rules governing controlling shareholders sit at the intersection of the two facets of the agency problem at the core of public corporations law. The first is the familiar principal-agency problem that arises from the separation of ownership and control. With only this facet in mind, a large shareholder may better police management than the standard panoply of market-oriented techniques. The second is the agency problem that arises between controlling and non-controlling shareholders, which produces the potential for private benefits of control. There is, however, a point of tangency between these facets. Because there are costs associated with holding a concentrated position and with exercising the monitoring function, some private benefits of control may be necessary to induce a party to play that role. Thus, from the point of view of public shareholders, the two facets of the agency problem present a tradeoff. The presence of a controlling shareholder reduces the managerial agency problem, but at the cost of the private benefits agency problem. Non-controlling shareholders will prefer the presence of a controlling shareholder so long as the benefits from reduction in managerial agency costs are greater than the costs of private benefits of control. The terms of this tradeoff are determined by the origami of judicial doctrines that describe the fiduciary obligations of a controlling shareholder. In this article, we examine the doctrinal limits on the private benefits of control from a particular orientation. A controlling shareholder may extract private benefits of control in one of three ways: by taking a disproportionate amount of the corporation's ongoing earnings; by freezing out the minority; or by selling control. Our thesis is that the limits on these three methods of extraction must be symmetrical because they are in substantial respects substitutes. We then consider a series of recent Delaware Chancery Court decisions that we argue point in inconsistent directions: on the one hand reducing the extent to which a controlling shareholder can extract private benefits through selling control, and on the other increasing the extent to which private benefits can be extracted through freezing out non-controlling shareholders. While judicial doctrine is too coarse a tool to specify the perfect level of private benefits, we believe these cases get it backwards - the potential for efficiency gains are greater from sale of control than from freeze outs, so that a shift that favors freeze outs as opposed to sales of control is a move in the wrong direction. In particular we argue that the Delaware law of freeze outs can be best reunified by giving "business judgment rule" protection to a transaction that is approved by a genuinely independent special committee that has the power to "say no" to a freeze out merger, while also preserving what amounts to a class-based appraisal remedy for transactions that proceed by freeze out tender offer without a special committee approval.

Trade-off Model of Debt Maturity Structure

Abstract: In this paper, we suggest the trade-off model to explain the choice of debt maturity. This model is based on balancing between risk and reward of using shorter-term loans. Shorter-term loans have cost advantage over, but incur higher refinancing and interest rate risk than longer-term loans. Using the Compustat data, we show that the principal components of financial attributes are financial flexibility and financial strength. Therefore, only firms with greater financial flexibility and financial strength can use proportionately more short-term loans. We also document that financially strong firms take advantage of lower interest rates of short-term debt. They use proportionately more short-term loans when the term premium is high. The results of our study also provide evidence supporting the agency cost hypothesis, which is strongly supported by current literature.

Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash

Abstract: Managers make different decisions in countries with poor protection of investor rights and poor financial development. One possible explanation is that shareholder-wealth maximizing managers face different tradeoffs in such countries (the tradeoff theory). Alternatively, firms in such countries are less likely to be managed for the benefit of shareholders because the poor protection of investor rights makes it easier for management and controlling shareholders to appropriate corporate resources for their own benefit (the agency costs theory). Holdings of liquid assets by firms across countries are consistent with Keynes' transaction and precautionary demand for money theories. Firms in countries with greater GDP per capita hold more cash as predicted. Controlling for economic development, firms in countries with more risk and with poor protection of investor rights hold more cash. The tradeoff theory and the agency costs theory can both explain holdings of liquid assets across countries. However, the fact that a dollar of cash is worth less than $0.65 to the minority shareholders of firms in such countries but worth approximately $1 in countries with good protection of investor rights and high financial development is only consistent with the agency costs theory.

The Case for Increasing Shareholder Power

Abstract: This paper reconsiders the basic allocation of power between boards and shareholders in publicly traded companies with dispersed ownership. U.S. corporate law has long precluded shareholders from initiating any changes in the company's basic governance arrangements. I show, and support with empirical evidence, that shareholders' existing power to replace directors is insufficient to secure the adoption of value-increasing governance arrangements that management disfavors. I put forward an alternative regime that would allow shareholders to initiate and adopt rules-of-the-game decisions to change the company's charter or state of incorporation. Providing shareholders with such power would improve over time to improve all corporate governance arrangements, largely by inducing management to initiate value-increasing changes and without shareholders' having to exercise their power to intervene.Furthermore, I argue that, as part of their power to amend governance arrangements, shareholders should be able to adopt provisions that give them additional power to intervene, down the road, in specific business decisions. Power to intervene in game-ending decisions (to merge, sell all assets, or dissolve) could address management's bias in favor of the company's continued existence. Power to intervene in scaling-down decisions (to make cash or in-kind distributions) could address management's tendency to retain excessive funds and engage in empire-building. Shareholders' ability to adopt, when necessary, provisions that give themselves additional power to intervene could thus produce benefits in many companies. A regime with shareholder power to intervene, I show, would address governance problems that have long troubled legal scholars and financial economists. These benefits would result mainly from inducing management to act in ways that better serve shareholder interests and without shareholders' having to exercise their power to intervene. I also discus how such a regime could best be designed to address concerns that supporters of management insulation could raise; for example, to allay such concerns, shareholder-initiated changes in governance arrangements could be adopted only if they enjoy shareholder support in two consecutive annual meetings. Finally, examining a wide range of possible objections, I conclude that they do not provide a good basis for opposing the proposed increase in shareholder power.

Taking Shareholder Protection Seriously? Corporate Governance in the United States and Germany

Abstract: The paper undertakes a comparative study of the set of laws affecting corporate governance in the United States and Germany, and an evaluation of their design - if one assumes that their objective were the protection of the interests of minority outside shareholders. The rationale for such an objective is reviewed, in terms of agency cost theory, and then the institutions that serve to bound agency costs are examined and critiqued. In particular, there is discussion of the applicable legal rules in each country, the role of the board of directors, the functioning of the market for corporate control, and (briefly) the use of incentive compensation. The paper concludes with the authors' views on what taking shareholder protection seriously, in each country's legal system, would require. Keywords: company law (United States, Germany), corporate governance (United States, Germany)

Corporate Governance and Implications for Minority Shareholders in Turkey

Abstract: This paper reports on the ownership and control structures of publicly listed firms in Turkey using data from 2001. While holding companies and non-financial firms are the most frequent owners at the direct level, families ultimately own more than 80 percent of all publicly listed firms in Turkey. Pyramids and dual class shares are common devices that families use to separate their cash-flow rights from control rights. We also show that such deviations result in significantly lower market to book ratios suggesting large agency costs because of the conflict of interests between controlling families and minority shareholders.

Interaction of Debt Agency Problems and Optimal Capital Structure: Theory and Evidence

Abstract: Does more leverage always worsen the debt agency problem? This paper presents a unified analysis that accounts for both risk-shifting and under-investment debt agency problems. For firms with positive marginal volatility of investment (defined as the change in cash flow volatility corresponding to a change of investment scale), equity holders' risk-shifting incentive will mitigate the under-investment problem. This implies that, contrary to conventional views, the total agency cost of debt does not uniformly increase with leverage. This model further predicts that, for high growth firms in which the under-investment problem is severe, the optimal debt ratio is positively related to the marginal volatility of investment. Empirical results support this prediction.

Dividend Policy and Agency Theory: Evidence from Indian Firms:

Abstract: In this article, the cost minimization model of dividends, which is underpinned by agency theory, is estimated and tested on data from 882 private sector firms listed on the Mumbai Stock Exchange for the period 1994 to 1998. Specifically, the hypothesis implied by the model is that private sector firms in India set their target payout ratios so as to minimize the sum of agency costs and the costs associ ated with raising external finance. Cross-sectional weighted least squares method ology is used, and squared and interaction terms are introduced into the model, along with a number of novel explanatory variables. It is found that government ownership, insider ownership, risk, debt, and growth opportunities, have a negative impact on the payout ratio. In contrast, institutional ownership, foreign ownership and dispersed ownership have a positive impact on the payout ratio. These results are consistent with the predictions of the cost minimization model of dividends in the context of listed companies in India.

Investor Protections and Concentrated Ownership: Assessing Corporate Control Mechanisms in the Netherlands

Abstract: The Berle-Means problem - information and incentive asymmetries disrupting relations between knowledgeable managers and remote investors - has remained a durable issue engaging researchers since the 1930's. However, the Berle-Means paradigm - widely-dispersed, helpless investors facing strong, entrenched managers - is under stress in the wake of the cross-country evidence presented by La Porta, Lopez-de-Silanes, Shleifer, and Vishny and their legal approach to corporate control. This paper continues to investigate the roles of investor protections and concentrated ownership by examining firm behaviour in the Netherlands. Our within country analysis generates two key results. First, the role of investor protections emphasized in the legal approach is not sustained. Rather, we find that performance is enhanced when the firm is freed of equity market constraints, a result that we attribute to the relaxation of the myopia constraints imposed by relatively uninformed investors. Second, ownership concentration does not have a discernible impact on firm performance, which may reflect large shareholders' dual role in lowering the costs of managerial agency problems but raising the agency costs of expropriation.

Agency Costs of Controlling Minority Shareholders

Abstract: This paper estimates the agency costs of controlling minority shareholders (CMSs), who have control of a firm's votes, while owning only a minority of the cash flow rights. Analyzing a panel of 309 listed Swedish firms during 1991 - 1997, for which we have complete and detailed data on ownership and corporate control instruments, we provide three results: (i) Families employ CMS structures, via dual-class shares and other corporate control instruments, about 1.5 - 2 times more often than other categories of owners (corporations, financial institutions). (ii) Estimated agency costs of controlling shareholders are 6 - 25% of firm value (Tobin's q) for the median firm among the different categories of controlling owners, ceteris paribus. Family CMSs are associated with the largest discount on firm value. (iii) The source of the discount seems to be partly what such owners/firms do: return on assets (ROA) is significantly lower for firms with concentrated vote control. It also seems as if the discount is related to what such owners/firms do not do. Family CMSs seem to hang on to the control too long from non-controlling shareholders' perspective; e.g., firms with family CMSs are about 50% less likely to be taken over compared to other firms.