Agency Costs Of Equity Research Articles

DOES MARKET MICROSTRUCTURE MATTER? FOREIGN AND DOMESTIC INSTITUTIONAL OWNERSHIP TO AGENCY COST

This research provides measure of absolute and relative equity agency costs for corporations under different ownership and management structures. Miller (1977) argues that divergence of opinion among investors causes the price difference of the price of a security. The dispute mechanism causes the forming price to be further of closer to its intrinsic value. Greater the divergence of opinion, causes greater the gap between the price and its’ intrinsic value. This study tests a new condition that reflects the existence of agency conflict, which is the conditions of stock price premium and stock price discount and related to agency cost control mechanism through foreign and domestic institutional ownership. The two conditions then called as price spread. This study tests four interrelated hypotheses in conditions of stock price premium and stock price discount that related to agency cost, foreign institutional ownership and domestic institutional ownership. Analysis method employs complete structural equation model (SEM), and multigroup SEM with constrained and unconstrained parameters. The direction of the study results consistent with result prediction. Nevertheless, there is one insignificant relationship, which is domestic institutional ownership towards agency cost. This indicates that the relationship hold but remains statistically unproven.

Why Do Companies Issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market

We study the announcement effects and their determinants of convertible debt issues in the Canadian market in order to identify issuer motives. The average wealth effect for the three-day event window around the announcement of convertible bonds between 1991 and 2004 is a significantly negative -2.7%. When the issues are classified into equity- and debt-like, we find that the wealth effects are significantly more negative for the equity-like convertible bond issuers. Equity-like convertibles are significantly negatively affected by agency costs of equity. However, agency costs of debt do not have a significant effect on equity-like convertibles and agency costs of equity do not have a significant effect on debt-like convertibles. These findings suggest that convertibles are used to mitigate different aspects of informational asymmetries. These findings are in line with motives proposed by Stein (1992). Moreover, we find that convertible debt offers announced by income trusts, which have become a special feature of the Canadian market, experience significantly less negative wealth effects than similar offers announced by other issuers. This result can be explained by a more debt-like convertible design and/or very low agency costs of equity in case of income trusts.

Capital Structure Theory: a Current Perspective

Finance scholars' approach to capital-structure issues reflects a progression of thought over time. This note provides an overview of the current state of capital-structure theory. One perspective on capital-structure choice is to view it as posing trade-offs among five elements: (1) the tax benefits of financing, (2) the explicit costs of financial distress, (3) the agency costs of debt (including an array of indirect costs linked to financial distress), (4) the agency costs of equity, and (5) the signaling effect of security issuance. The first two elements reflect the modern, traditional balancing theory of capital structure. The third and fourth build on agency theory and imperfect information and emphasize the individual incentives of decision makers. The fifth element recognizes that the very act of issuing a security can convey new information to investors when there is imperfect information. While newer theories provide a rich array of insights into aspects of financial policy beyond how much debt the firm should undertake, the downside is that at present there is no overarching synthesis of these theories. As a result, practical application requires careful identification of how these particular theories are relevant to the business, the markets, and the situation at hand. This note is well suited to an advanced corporate-finance course after students have been exposed to the basic theory.

The Impact of Family Control on Investors' Risk and Performance of Italian Listed Companies

Agency costs, deriving from the separation between ownership and control, affect whatever company model. In case of firms with dispersed ownership (the public companies), the classic agency conflict regards the relation between shareholders and managers. In case of family firms the classic agency conflicts are mitigated thanks to reduced separation between ownership and control, but there are other types of agency conflicts, moreover between family shareholders and minority ones. This paper focuses on the relation between agency costs and ownership structure, in the specific perspective of minority shareholders, providing a first empirical evidence of the proposition that family ownership reduces the agency costs of equity and has a negative effect on the equity risk perceived by the market. The analysis statistically compares family and non-family firms, sorted from Italian listed companies, in any sector with a significant presence of family business, to get evidence of family's ownership impact on equity cost of capital.

Shareholder-Manager Alignment and the Cost of Debt

We investigate the influence of shareholder-manager incentive alignment on the cost of debt using a sample of dual-class firms, where managerial voting rights and cash-flow rights can be separated. We find the cost of debt financing increases in managerial voting rights and decreases in cash-flow rights. However, we also find that the amount of leverage increases in managerial voting rights and decreases in cash-flow rights. Together the results suggest that although the cost of debt increases when shareholder and manager interests diverge, the cost of debt relative to the cost of equity declines, making debt more appealing to firms with high potential agency costs of equity.

IPOs in the Upside Down World of Over-Valued Equity

For IPOs in the computer software industry, we find that first day returns can be attributed to pre-IPO risk and acquisition activities consistent with Jensen’s (2005) perspective of the agency costs of over-valued equity. To this we add the theory of the sentiment investor as the driver of inflated first day returns.

A Comparison of Listed Vs. Non-Listed Firm Capital Structure: Evidence from Sweden

The importance of a number of agency costs of debt and equity which affect capital structure choice differs between listed and non-listed firms. It follows that there should be differences in the ...

The Structure of Executive Compensation: International Evidence from 1996-2004

The primary objective of this study is to better understand the time-series and cross-sectional variation in the structure of executive compensation for non-U.S. firms. That is, has the globalization of labor markets for senior management led non-U.S. firms to design compensation contracts similar to those of U.S. firms or, are there country-specific factors that may cause compensation structures to differ? Using data from 36 non-U.S. countries over 1996-2004, we document significant cross-country differences in compensation structure (i.e., relative use of equity-based and cash-based compensation). The primary determinants of this cross-sectional variation are institutional factors related to the legal environment in each country. Specifically, firms use more equity-based compensation in countries that provide stronger protection of shareholder's rights or have English common-law legal origins. Similarly, firms in countries providing strict enforcement of the rule of law use more equity-based compensation. In addition to these institutional determinants, we find some evidence that the relative use of equity-based compensation is also affected by the firm's agency costs of debt and equity. The data indicate that non-U.S. firms with higher growth opportunities (and the resultant larger agency costs of equity) use relatively more equity-based compensation. We also find that larger firms and firms with lower free cash flow use more equity-based compensation. These findings are consistent with those documented by Yermack (1995) and Bryan et al. (2000) for U.S. firms. However, unlike in the U.S., our data indicate that the agency problems of debt have only a limited effect on compensation structure. Therefore, while the agency theory tested with U.S. compensation data is broadly portable to other markets, the explanatory power is not as significant when applied to non-U.S. firms. We also track compensation structures throughout the time period and seek to identify and explain relative differences between compensation polices of U.S. and non-U.S. firms. The data allow us to test whether compensation structure has converged (as would be suggested by the globalization of financial markets). Alternatively, cross-country institutional differences would suggest a continued divergence in compensation policies across nations. The data provide no evidence of international convergence of compensation structures. Our empirical analysis attributes these pervasive differences to institutional factors. That is, despite the substantial changes in capital market conditions throughout the sample period, institutional factors remain as significant determinants of compensation structure and appear to contribute to consistent cross-country differences in compensation structure.

Agency Costs of Overvalued Equity

Agency Costs of Overvalued Equity

Can the agency costs of debt and equity explain the changes in executive compensation during the 1990s?

Contracting theory predicts that greater equity-related compensation will decrease the agency problems of equity but may exacerbate the agency problems of debt. We present evidence that the agency costs of debt may have declined during the 1990s. Specifically, changes in the financial characteristics of our sample firms suggest that underinvestment, asset substitution, and financial distress became less likely. Furthermore, agency costs of equity increased during the 1990s, primarily because firms became more difficult to monitor. Together, the findings provide an explanation for why more firms used option-based compensation in the latter 1990s, and why the proportion of options in compensation structure increased throughout the decade of the 1990s.

Bond market entry around the world: does public debt discipline managers?

This paper documents the impact of bond IPOs on the agency costs of equity. We find that bond market entry is received unfavorably when the debt issue is motivated by keeping a lock on control. Conversely, when discipline is expected to increase due to bond market entry (high free cash flow, low dividends), stock price reactions are more positive. Moreover, the strength of these relations is affected by worldwide differences in shareholder protection. Free cash flow has a larger impact when investor protection is stronger, whereas dividends and control locks are more important when shareholder protection is poor.

Does Bad Corporate Governance Lead to too Little Competition? Corporate Governance, Capital Structure, and Industry Concentration

We examine the relationships among corporate governance, industry concentration and financial structure that emerge endogenously in an economy. We consider entrepreneurs whose ability to raise capital is limited by the presence of agency costs in both the equity and debt markets. We argue that the quality of the corporate governance system may have a significant impact on the economy's level of competition and its degree of industry concentration. Thus, the causality between the quality of an economy's corporate governance and its degree of competition may indeed run in the opposite way to the one suggested in traditional theory: poor corporate governance and low investor protection may in fact lead to high industry concentration. We also characterize the relationships between debt-ratios, market-to-book ratios of equity, ownership concentration, industry concentration and firms' profitability in such economy, and we generate predictions on the cross sectional variations that would emerge both within an economy and in cross-country comparisons. Finally, we show that the agency costs of equity interact with the moral hazard problem in debt market in a way that (contrary to previous theory) the presence of convertible debt in a firm's capital structure may increase, rather than decrease, the insiders' incentives to take excessive risks.

Agency Costs of Overvalued Equity

I define and analyze the agency costs of overvalued equity. They explain the dramatic increase in corporate scandals and value destruction in the last five years; costs that have totaled hundreds of billions of dollars. When a firm's equity becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage—forces that almost inevitably lead to destruction of part or all of the core value of the firm. WorldCom, Enron, Nortel, and eToys are only a few examples of what can happen when these forces go unmanaged. Because we currently have no simple solutions to the agency costs of overvalued equity this is a promising area for future research.

The Association of Managerial Ownership with Dividend Policy and Leverage Policy: Indonesian Firms

The research examines the relationship of financial policy (dividend and leverage) influenced managerial ownership. Managerial ownership as dependent variable regressed with dividend and leverage policy that already separate the effect of agents and insiders wealth. Logit Model is use to examine the relationship because managerial ownership proxy by dummy variable. Hosmer-Lemeshow and Andrews Goodness-Of-Fit test used to conclude the model fitted. Result showed a significant relationship that financial policy influenced probability firm engages in managerial ownership program. Dividend policy is a substitute for managerial ownership. The lower dividend level will increase the probability of the firm engage in managerial ownership program and still maintain the effectiveness of reducing agency cost of equity. The lower leverage level will increase the probability of the firm engage in managerial ownership program to multiply the effect of reduced agency cost of debt with the reduction in agency cost of equity.

The Agency Costs of Overvalued Equity and the Current State of Corporate Finance

European Financial ManagementVolume 10, Issue 4 p. 549-565 The Agency Costs of Overvalued Equity and the Current State of Corporate Finance Michael C. Jensen, Michael C. Jensen Jesse Isidor Professor of Business Administration, Emeritus, Harvard Business School and Managing Director, Organizational Strategy Practice, The Monitor Group. e-mail: Mjensen@hbs.eduSearch for more papers by this author Michael C. Jensen, Michael C. Jensen Jesse Isidor Professor of Business Administration, Emeritus, Harvard Business School and Managing Director, Organizational Strategy Practice, The Monitor Group. e-mail: Mjensen@hbs.eduSearch for more papers by this author First published: 12 November 2004 https://doi.org/10.1111/j.1354-7798.2004.00265.xCitations: 98 Keynote Address to the 2002 European Financial Management Association (EFMA) Meetings, London, UK, June 2002. AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume10, Issue4December 2004Pages 549-565 RelatedInformation

Agency costs and ownership structure in Australia

Financial economics often assumes that equity agency costs increase with the separation of ownership and control. This paper tests this relationship using a survey sample of approximately 3800 Australian small and medium enterprises for 1996–1997 and 1997–1998. Following Ang et al. [J. Finance 55 (2000) 81], we estimate a zero equity agency cost benchmark (in terms of operating expenses and asset utilization ratios) for the 100% owner-manager firm. We then examine how agency costs change when ownership and control are separated. We report a positive relationship between equity agency costs and the separation of ownership and control.

Equity Agency Costs Amongst Manufacturing SMEs

The principal objectives in this paper are to assess and to build upon the recently published research of Ang et al. (2000) making a pioneering attempt to estimate equity agency costs in a large cross-sectional sample of smaller, non-publicly traded companies in the United States. The present research employs panel data for 871 manufacturing SMEs legally organised as proprietary companies, taken from the Australian federal government's Business Longitudinal Survey conducted over four financial years from 1994–1995 to 1997–1998. The two proxies for equity agency costs that are trialed – operating expense ratio and asset turnover ratio – both appear lower in more complex agency relationships. It is also found that greater enterprise growth is significantly more evident amongst SMEs with more complex agency relationships. Thus, it is possible that observed differences in values for the two equity agency cost proxies are not the direct consequence of differences in management and ownership structures; but, rather, of differences in the experience of enterprise growth, possibly enabled to some degree by the management and ownership structures adopted. This raises the question of whether, in fact, operating expense ratio and asset turnover ratio can be reliably used as proxies for equity-related agency costs in SME research.

Capital Structure, Management Ownership and Large External Shareholders: A UK Analysis

This paper examines empirically the effects of management ownership and ownership by large external shareholders on the capital structure of the firm from an agency theory perspective. The paper extends the US literature on the topic by examining the effect of interactions between management ownership and ownership by large external shareholders on the capital structure of UK firms. For a sample of UK firms, the paper provides empirical evidence that suggests the debt ratio is positively related to management ownership and negatively related to ownership by large external shareholders. Furthermore, the presence of a large external shareholder acts to negate the positive relationship between debt ratios and management ownership; in the presence of a large external shareholder, no significant relationship between debt ratios and management ownership exists. These findings are consistent with the hypothesis that the presence of large external shareholders affects the agency costs of debt and equity.

Agency Costs and Ownership Structure

We provide measures of absolute and relative equity agency costs for corporations under different ownership and management structures. Our base case is Jensen and Meckling's (1976) zero agency‐cost firm, where the manager is the firm's sole shareholder. We utilize a sample of 1,708 small corporations from the FRB/NSSBF database and find that agency costs (i) are significantly higher when an outsider rather than an insider manages the firm; (ii) are inversely related to the manager's ownership share; (iii) increase with the number of nonmanager shareholders, and (iv) to a lesser extent, are lower with greater monitoring by banks.

Realigning Corporate Governance: Shareholder Activism by Labor Unions

Labor unions are aggressively using their ownership power to push corporate-governance reforms. So far, much of their activity is tactical. Lasting changes in corporate governance can occur if unions develop a more strategic model of their role in corporate governance. A stretegic model would require unions to concentrate on areas where their interests coincide with other shareholders and where they can demonstrte that their actions will increase firm value. This requires that labor unions adopt a platform of maximizing long-term growth for shareholders and other stakeholders, as well as for themselves. In particular, unions must convince other shareholders that they are acting in areas where they have an informational advantage about the corporation's and management's operations. If labor can demonstrate to other sharholders that it is using its monitoring advantagaes to take actions to increase firm value by policing management shirking and reducing the agency costs of equity, then other shareholders will be more willing to follow its lead in future voting initiatives. This opens up the possibility that labor union shareholders could reinvigorate some currently ineffectual corporate-governance systems. These might include the policing of securities fraud and other types of corporate misconduct through the use of existing litigation techniques.