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Firm value and managerial incentives: a stochastic frontier approach


Habib, Michel A; Ljungqvist, Alexander (2005). Firm value and managerial incentives: a stochastic frontier approach. The Journal of Business, 78(6):2053-2094.

Abstract

We provide a direct estimate of the magnitude of agency costs in publicly held corporations. We compute an explicit performance benchmark that compares a firm's actual Tobin's Q to the Q* of a hypothetical value-maximizing firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 16% below its Q*, equivalent to a $1,432 million reduction in its potential market value. We relate the shortfall to the incentives provided CEOs. Boards appear to grant CEOs too few shares and too many options that are insufficiently sensitive to firm risk.

Abstract

We provide a direct estimate of the magnitude of agency costs in publicly held corporations. We compute an explicit performance benchmark that compares a firm's actual Tobin's Q to the Q* of a hypothetical value-maximizing firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 16% below its Q*, equivalent to a $1,432 million reduction in its potential market value. We relate the shortfall to the incentives provided CEOs. Boards appear to grant CEOs too few shares and too many options that are insufficiently sensitive to firm risk.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Business and International Management
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Statistics, Probability and Uncertainty
Scope:Discipline-based scholarship (basic research)
Language:English
Date:1 November 2005
Deposited On:14 Aug 2020 15:10
Last Modified:23 Jun 2024 01:41
Publisher:University of Chicago Press
ISSN:0021-9398
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1086/497040
Other Identification Number:merlin-id:19637
  • Content: Published Version
  • Language: English