Debt finance and the cost of management ownership: Some elementary results

Increased debt reduces a company's equity base, which reduces the dollar investment a manager must make to hold a given proportion of stock. Therefore, it is often argued, managers' effort incentives are improved by high leverage. This paper shows that while risky debt reduces the cost of providing managers with substantial equity ownership, the cheaper equity captures less of the fruits of the manager's effort. Managers' effort incentives are improved by high debt levels only under quite restrictive conditions. These conditions are more plausible when agency problems are due to a managerial propensity to expand size by investing in negative net present value projects. The results also imply that when debt is increased to reduce the agency costs of free cash flow, the accompanying covenants should allow for substantial cash distributions to shareholders even before bondholder claims are satisfied.     

Moral hazard,debt overhang and capital structure

This paper investigates the impact of managerial moral hazard on the debt overhang of a firm by constructing a contingent claims model in which the manager faces costly effort. Using a calibrated capital structure model, we show that the costs of debt overhang become more serious in the presence of managerial moral hazard. Such costs even account for more than half of the total agency costs at a high level of cash flow. Moreover, in contrast to the results of Hackbarth and Mauer (2012), our model predicts a U-shaped relationship between the leverage ratio and investment opportunities of a firm, which is caused by managers’ moral hazard. Finally, by considering this moral hazard, we also show the coexistence of low leverage ratios and high credit spreads, which explains the phenomenon of “low debt levels and high credit spreads” observed in practice.     

Learning about individual managers’ performance in UK pension funds: The importance of specialization

This study examines the performance of managers over time, as well as its persistence, taking into account both manager characteristics and market conditions. Applying parametric and non-parametric methodologies, we examine a sample of UK equity pension fund managers. Our results help to understand the importance of manager assignments in the industry and reveal the importance and benefits of management specialization. We find certain manager performance persistence, revealing that some managers are better than others and possess superior investment skills. Additionally, we find that managers achieve better results when they run a single fund or one investment-objective funds, which allows managers to focus on specific tasks. Nonetheless, manager performance varies with market conditions and highlights managers’ different skills. Specialist managers perform better in bullish markets, and generalists perform better in bearish periods.     

行为公司金融研究综述

行为公司金融的研究主要基于以下两个不同的模型。模型之一是"非理性投资者"模型。这一模型假设管理者是理性的,它研究的是投资者的非理性行为对公司金融决策的影响;模型之二是"非理性管理者"模型。这一模型假设投资者是理性的,它研究的是管理者的非理性行为对公司金融决策的影响。文章综述行为公司金融学在理论、实证研究等方面的成果,并提出一些行为公司金融学需要回答的问题。     

Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China

This study provides empirical evidence of managerial agency costs in socialistic internal capital markets. Listed Chinese companies are required to disclose the amount of resources that are reallocated to other firms of the parent company, which provides us with a direct measure of the socialistic subsidization of weak member firms by strong member firms within a business group. We hypothesize that in strong member firms, managerial compensation is less sensitive to firm performance because cross‐subsidization makes it difficult for group CEOs to hold the managers in strong firms accountable for their own firms' performance, and also increases the noise in performance measures. We also hypothesize that socialistic cross‐subsidization results in an increase in managerial agency costs of strong member firms due to the low pay‐performance sensitivity and low incentive to work hard. We document empirical results that are consistent with these two predictions.     

管理者过度自信与权益资本成本——来自我国证券市场的经验证据

以深圳证券市场A股上市公司为样本,研究了管理者过度自信与权益资本成本之间的关系。研究发现,高管层过度自信的心理特征是通过影响企业的投资行为造成过度投资,进而影响到投资与融资现金流之间的敏感性,导致激进融资,使企业权益资本成本增加。     

Agency costs and dividend payments: The case of bank holding companies

This paper examines the hypothesis that agency costs are a primary factor motivating dividend payments. Norohna et al. (1996) present evidence that the agency cost rationale is context specific and that dividends will not be driven by agency costs when other mechanisms exist for controlling agency problems. We argue that regulation of bank holding companies involves a context specific case where agency costs may be less relevant. Using an empirical methodology similar to Born and Rimbey’s (1993), we find that the abnormal returns associated with dividend announcements by bank holding companies are not related to their external financing activities. The monitoring activities of the capital markets are not a rationale for dividend payments in the presence of bank regulation. Our results are robust to an alternative explanation involving the signaling role of new equity financings.     

How Do Financial Constraints Relate to Financial Reporting Quality? Evidence from Seasoned Equity Offerings

This paper examines how constraints on firms’ financing capacity relate to managers’ discretionary accounting choices. Three hypotheses of earnings management – the opportunism hypothesis, the rational expectations hypothesis, and the signaling hypothesis – predict that constrained firms engage in greater upward earnings management than unconstrained firms when selling equity. Using a sample of seasoned equity offerings (SEOs) announced between 1983 and 2014, I find support for this prediction. The relation between financial constraints and earnings management is robust to including controls such as offer size, growth opportunities, analyst following, and chief executive officer equity holdings, as well as to using the instrumental variable approach. Investors’ reaction around and following the SEO announcement supports the rational expectations hypothesis. I find that aggressive earnings management by constrained issuers is associated with lower SEO announcement returns but is not followed by negative abnormal returns in the long run. The evidence suggests that constrained issuers’ aggressive use of income-increasing accruals is an outcome of managerial myopia caused by capital market pressure, not managerial opportunism intended to mislead investors.     

Modeling the unintended consequences of short selling for innovation investment

We develop an innovation investment decision model for firms facing a short selling threat. We find that an endogenous agency problem may arise as an unintended consequence of short selling under the prevailing compensation structure. Specifically, the manager has strong incentives to seek better compensation at the expense of decreasing firm value by reducing long-term innovation investment to save cash reserves to protect the short-term price because the manager’s compensation is closely tied to this value. Finally, our model predicts that both the lending supply and short selling will induce the manager to underinvest and have a negative effect on firm value and the manager’s private benefit because they exacerbate agency conflicts.     

Do managers make takeover financing decisions that circumvent more effective outside blockholders?

Consistent with agency theory, we find that bidder managers make takeover financing decisions in ways that circumvent more effective monitors. Bidder managers are more likely to use cash rather than stock when targets have aggressive outside blockholders. We also find that the likelihood of a cash offer decreases when aggressive outside bidder block ownership is relatively low. However, the likelihood of a cash offer increases when aggressive outside bidder blockholding is in the intermediate range, a range of ownership where their continued influence over managerial decisions is threatened by a stock offer. Furthermore, we find that bidder management tends to use cash when its outside bidder blockholders are less aggressive. Overall, our findings indicate that managerial decisions on financing takeovers are motivated to prevent aggressive outside blockholders from gaining more control.     

Managerial Compensation and Capital Structure

We investigate the interaction between financial structure and managerial compensation and show that risky debt affects both the probability of managerial replacement and the manager's wage if he is retained by the firm. Our model yields a rich set of predictions, including the following: (i) The market values of equity and debt decrease if the manager is replaced; moreover, the expected cash flow affirms that retain their managers exceeds that affirms that replace their managers, (ii) Managers affirms with risky debt outstanding are promised lower severance payments (golden parachutes) than managers affirms that do not have risky debt. (Hi) Controlling for firm's size, the leverage, managerial compensation, and cash flow of firms that retain their managers are positively correlated, (iv) Controlling for the firm's size, the probability of managerial turnover and firm value are negatively correlated, (v) Managerial pay-performance sensitivity is positively correlated with leverage, expected compensation, and expected cash flows.     

Valuing Japan-based German expatriate and local manager's functions: do subsidiary age and managerial perspectives matter?

Managerial functions valued by expatriates and reasons for appointing host country managers were examined in an exploratory, multimethod (interview and questionnaire) study with expatriates and local managers as the respondents. Based on theoretical perspectives of agency theory, transaction costs theory, resource-based views and organizational learning theory, changes in the valuation of these functions were hypothesized and examined for subsidiary age and nationality of the respondent. Expatriate and local managers' views supported previous research on certain management functions but differed on others (e.g. management development). The data indicated curvilinear relationships for a number of managerial functions between nationality of top manager and age of the subsidiary. Strategic factors were analysed by subsidiary age and nationality of the respondent manager to understand more about maturity of host company operations and strategic orientations. The results indicated the growth in the strategic functions of technological leadership and market development/branding in older subsidiaries. Implications of the results were discussed.     

Why a Multinational Firm Chooses Expatriates: Integrating Resource‐Based,Agency and Transaction Costs Perspectives*

abstract This paper develops an integrative organizational economics framework explaining and predicting multinational firms' managerial resource deployments based on resource‐based, agency, and transaction costs theories. Our empirical findings suggest that the governance decision for managerial services of multinational firms is influenced not only by the comparative capabilities of managers, but also by the economic costs to the firm of influencing the behaviours of managers through managerial contracting.     

Optimal effort in the principal-agent problem with time-inconsistent preferences

This paper incorporates an agent’s time-inconsistent preferences into the Sannikov (2008) contract model to explore the effects of an agent’s preferences on his own behaviors: the incentive effort choice, the optimal retirement time and the consumption flow during his whole career life. We find the agent’s time inconsistency makes it difficult for him to be motivated and makes him need more compensation. An agent’s time-inconsistency erodes both the principal and his own income. The time-inconsistent agent will choose a lower incentive effort level, retire at an earlier time and have a lower consumption flow compared with his time-consistent peer. The time-inconsistent preference exactly influences the agents behavior and makes the agency problem more serious. Therefore, the firm has to cost more to stimulate such a time-inconsistent agent, which will damage the firms profits, as well as the efficiency.     

Managers and Wage Policies

Do individual top managers matter for wages and wage policies? Are there general differences in “style” among managers with respect to worker compensation? To shed light on these questions, we exploit a large panel dataset from Portugal that allows us to match workers, firms, and managers, and follow the movements of the latter across different firms over time. While accounting for the effect of worker and firm heterogeneity, we estimate the role of top manager fixed effects in determining wages and wage policies. The estimates suggest that (i) top managers have a significant influence on wages and wage policies; (ii) there exists different managerial “styles”; and (iii) managers’ (observable) attributes matter for worker compensation.     

资本结构与代理成本关系研究评述

资本结构与代理成本之间的关系始终是研究者关注的焦点。本文认为,资本结构中权益资本和债务资本会引发不同的代理成本,其产生的根源在于管理者与股东以及债权人与权益投资者之间存在不同的利益格局。在第一类和第二类代理冲突中,债务均具有重要的地位,但债务在第二类代理冲突中的作用与第一类冲突中显著不同。当企业股权集中时,大股东掌握着企业的实际控制权,企业的主要代理问题成为控股大股东与中、小股东之间的代理问题,这会导致其资本结构的代理成本与第一类和第二类代理成本显著不同。     

资本结构与代理成本关系研究评述

资本结构与代理成本之间的关系始终是研究者关注的焦点。本文认为,资本结构中权益资本和债务资本会引发不同的代理成本,其产生的根源在于管理者与股东以及债权人与权益投资者之间存在不同的利益格局。在第一类和第二类代理冲突中,债务均具有重要的地位,但债务在第二类代理冲突中的作用与第一类冲突中显著不同。当企业股权集中时,大股东掌握着企业的实际控制权,企业的主要代理问题成为控股大股东与中、小股东之间的代理问题,这会导致其资本结构的代理成本与第一类和第二类代理成本显著不同。     

The effects of corporate antitakeover provisions on long-term investment: empirical evidence

This paper's empirical results indicate that the average effect of antitakeover provisions on subsequent long‒term investment is negative. The interpretation of these results depends on whether one thinks that there was too much, too little, or just the right amount of long‒term investment prior to the antitakeover provision adoption. We use agency theory to devise more refined empirical tests of the effects of antitakeover provision adoption by managers in firms with different incentive and monitoring structures. Governance variables (e.g. percentage of outsiders on corporate boards, and separate CEO/chairperson positions) have an insignificant impact on subsequent long‒term investment behavior. However, consistent with agency theory predictions, managers in firms with better economic incentives (higher insider ownership) tend to cut subsequent long‒term investment less than managers in firms with less incentive alignment. Furthermore, managers in firms with greater external monitoring (due to higher institutional ownership) also tend to cut subsequent long‒term investment less than managers in firms with less external monitoring. Thus, the decrease in subsequent long‒term investment is significantly less for firms where the managers have greater incentives to act in shareholders' interests. Finally, there are interesting effects of the control variables. First, high book equity/market equity firms cut total long‒term investment more. Second, firms that were takeover targets or rumored to be takeover targets cut long‒term investment more. These results suggest that inefficient firms cut long‒term investment more when an antitakeover provision is adopted. © 1997 John Wiley & Sons, Ltd.     

Contingent capital,capital structure and investment

We examine the interaction between investment and financing policies in a dynamic model for a firm with existing assets-in-place and a growth option, of which investment cost is financed with equity and contingent convertible bonds (CoCos). We attempt to clarify how CoCos impact on investment timing, capital structure and inefficiencies arising from debt overhang and asset substitution. We show that there is a conversion ratio (the fraction of equity allocated to CoCo holders upon conversion) to eliminate the inefficiencies. Our conclusions predict that debt leverage decreases with investment option payoff factor and the average appreciation rate of the cash flow. In contrast to traditional corporate finance theory saying that a firm's value decreases globally with business risk, our model indicates that it might first decrease and then increase with asset volatility.     

Overinvestment and fraud

We analyze the interactions between two managerial tasks: investing and revealing information. We assume that a manager can invest influencing the firm’s quality, then he reports this quality to investors. Whenever truthful reporting is not an equilibrium, the manager has incentives to overinvest relative to shareholders. Therefore, the potential for market manipulation is the key in understanding investment policy; it is the desire to manipulate prices that leads to inefficient investment. Also, more manipulation occurs when the manager is in control, so prices are less informative. Finally, we show that the manager is better off with an exogenous reporting policy.