Abstract
This paper examines the corporate value of a decentralized firm in the presence of principal-agent conflicts due to information asymmetries. When owners delegate the management to managers, contracts must be designed to provide incentive for managers to truthfully reveal private information. Using a contingent claims approach, we demonstrate that an underlying option value of the firm can be decomposed into two components: a manager's option and an owner's option. The value of a decentralized firm is lower than that of an owner-managed firm. In particular, the implied manager's decisions in a decentralized firm differ significantly from those in an owner-managed firm.
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