Testing Agency Theory with Entrepreneur Effort and Wealth

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Testing Agency Theory with Entrepreneur Effort and Wealth

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MARIANNE P. BITLER
TOBIAS J. MOSKOWITZ
ANNETTE VISSING-JØRGENSEN

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Marianne P. Bitler

Abstract

We develop a principal-agent model in an entrepreneurial setting and test the model's predictions using unique data on entrepreneurial effort and wealth in privately held firms. Accounting for unobserved firm heterogeneity using instrumental-variables techniques, we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk; effort increases with ownership; and effort increases firm performance. The magnitude of the effects in the cross-section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity. Copyright 2005 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 60 (2005)
Issue (Month): 2 (04)
Pages: 539-576
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Handle: RePEc:bla:jfinan:v:60:y:2005:i:2:p:539-576

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Lotta Väänänen, 2003. "Agency Costs and R&D: Evidence from Finnish SMEs," Discussion Papers 859, The Research Institute of the Finnish Economy. [Downloadable!]
Gérard Charreaux, 2008. "La recherche en finance d’entreprise:quel positionnement méthodologique?," Working Papers FARGO 1080501, Université de Bourgogne - Latec/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
Other versions:
- Gérard Charreaux, 2008. "La recherche en finance d’entreprise:quel positionnement méthodologique ?," Revue Finance Contrôle Stratégie, Editions Economica, vol. 11(Special), pages 237-290, June.
Henrekson, Magnus & Sanandaji, Tino, 2008. "Entrepreneurship and the Theory of Taxation," Working Paper Series 732, Research Institute of Industrial Economics, revised 19 Aug 2009. [Downloadable!]
Andrea Caggese, 2006. "Entrepreneurial Risk, Investment and Innovation," Economics Working Papers 1011, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
Other versions:
- Andrea Caggese, 2006. "Entrepreneurial Risk, Investment and Innovation," 2006 Meeting Papers 412, Society for Economic Dynamics. [Downloadable!]
Luc Laeven & Ross Levine, 2008. "Bank Governance, Regulation, and Risk Taking," NBER Working Papers 14113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Fatih Guvenen, 2005. "Do Stockholders Share Risk More Effectively Than Non- stockholders?," Macroeconomics 0508006, EconWPA. [Downloadable!]
Other versions:
- Fatih Guvenen, 2007. "Do Stockholders Share Risk More Effectively than Nonstockholders?," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 275-288, 03. [Downloadable!] (restricted)
V. V. Chari & Mikhail Golosov & Aleh Tsyvinski, 2005. "Business Start-ups, The Lock-in Effect, and Capital Gains Taxation," Levine's Bibliography 784828000000000439, UCLA Department of Economics. [Downloadable!]
Other versions:
- V. V. Chari & Mikhail Golosov & Aleh Tsyvinski, 2003. "Business Start-ups, the Lock-in Effect, and Capital Gains Taxation," Levine's Bibliography 506439000000000222, UCLA Department of Economics. [Downloadable!]
Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers 6910, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Müller, Elisabeth, 2004. "Underdiversification in Private Companies : Required Returns and Incentive Effects," ZEW Discussion Papers 04-29, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," NBER Working Papers 14848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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- Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-180, Boston University - Department of Economics. [Downloadable!]
George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Müller, Elisabeth, 2005. "How Does Owners? Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies?," ZEW Discussion Papers 05-14, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
Other versions:
- Müller, Elisabeth, 2006. "How Does Owners? Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies?," ZEW Discussion Papers 05-14 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
- Mueller, Elisabeth, 2008. "How does owners' exposure to idiosyncratic risk influence the capital structure of private companies?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 185-198, March. [Downloadable!] (restricted)
Li, Fei & Ueda, Masako, 2005. "CEO-Firm Match and Principal-Agent Problem," CEPR Discussion Papers 5119, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Ross Levine & Luc Laeven, 2007. "Complex Ownership Structures and Corporate Valuations," IMF Working Papers 07/140, International Monetary Fund. [Downloadable!]
Other versions:
- Luc Laeven & Ross Levine, 2006. "Complex Ownership Structures and Corporate Valuations," NBER Working Papers 12675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(2), pages 579-604, April. [Downloadable!] (restricted)

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