Header

UZH-Logo

Maintenance Infos

The effect of agency problems on optimal operating leverage and social welfare


Chen, Hui (2015). The effect of agency problems on optimal operating leverage and social welfare. Journal of Accounting and Public Policy, 34(3):319-331.

Abstract

In this paper, we examine a firm’s choice of operating leverage in a principal-agent setting and find that the degree of operating leverage is strictly lower when the manager’s actions are unobservable. Further, the production output is also lower when agency problems are present. The suboptimal operational decisions result in not only decreased shareholder value, but also lower consumer surplus and lower total social welfare. However, accounting information can help mitigate this problem. Specifically, the more precise the accounting information, the less the reduction in the players’ payoffs. The results of this paper may provide some insight on how risk affects a firm’s stakeholders differently, and what consequences it has in a broader economic sense.

Abstract

In this paper, we examine a firm’s choice of operating leverage in a principal-agent setting and find that the degree of operating leverage is strictly lower when the manager’s actions are unobservable. Further, the production output is also lower when agency problems are present. The suboptimal operational decisions result in not only decreased shareholder value, but also lower consumer surplus and lower total social welfare. However, accounting information can help mitigate this problem. Specifically, the more precise the accounting information, the less the reduction in the players’ payoffs. The results of this paper may provide some insight on how risk affects a firm’s stakeholders differently, and what consequences it has in a broader economic sense.

Statistics

Citations

Dimensions.ai Metrics

Altmetrics

Downloads

54 downloads since deposited on 22 Aug 2019
6 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Sociology and Political Science
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2015
Deposited On:22 Aug 2019 14:31
Last Modified:02 Jun 2024 03:34
Publisher:Elsevier
ISSN:0278-4254
OA Status:Green
Publisher DOI:https://doi.org/10.1016/j.jaccpubpol.2015.03.003
Other Identification Number:merlin-id:18028
  • Content: Accepted Version