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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. SSRN 2358670, University of Zurich.

Abstract

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

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.

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Additional indexing

Item Type:Working Paper
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
Language:English
Date:2015
Deposited On:23 Aug 2019 14:08
Last Modified:16 Apr 2020 00:03
Series Name:SSRN
Number of Pages:25
ISSN:0278-4254
Additional Information:Forthcoming, Journal of Accounting and Public Policy
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.2358670
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358670
Other Identification Number:merlin-id:11801

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