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Agency Costs of Overvalued Equity

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Author Info
Michael C. Jensen

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Abstract

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.

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Publisher Info
Article provided by Financial Management Association in its journal Financial Management.

Volume (Year): 34 (2005)
Issue (Month): 1 (Spring)
Pages:
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Handle: RePEc:fma:fmanag:jensen05

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  2. Günter Franke & Christian Hopp, 2005. "M&A Transaktionen: Fluch und Segen der Realoptionstheorie," CoFE Discussion Paper 05-03, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  3. Sara B. Moeller & Frederik P. Schlingemann & Rene M. Schultz, 2004. "Do Acquirers With More Uncertain Growth Prospects Gain Less From Acquisitions?," Working Papers 05-17, Utrecht School of Economics. [Downloadable!]
  4. DEGEORGE, François & DING, Yuan & JEANJEAN, Thomas & STOLOWY, Hervé, 2005. "Does Analyst Following Curb Earnings Management?," Les Cahiers de Recherche 810, HEC Paris. [Downloadable!]
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  6. Jiao, T. & Mertens, G.M.H. & Roosenboom, P.G.J., 2007. "Industry Valuation Driven Earnings Management," Research Paper ERS-2007-069-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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  8. Kothari, S.P. & Loutskina, Elena & Nikolaev, Valeri, 2006. "Agency theory of overvalued equity as an explanation for the accrual anomaly," Discussion Paper 103, Tilburg University, Center for Economic Research. [Downloadable!]
  9. Sharon Katz, 2008. "Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors," NBER Working Papers 14085, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Benmelech, Effi & Kandel, Eugene & Veronesi, Pietro, 2007. "Stock-Based Compensation and CEO (Dis)Incentives," CEPR Discussion Papers 6515, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Ajit Singh & Jack Glen & Ann Zammit & Rafael De-Hoyos & Alaka Singh & Bruce Weisse, 2005. "Shareholder Value Maximisation, Stock Market and New Technology: Should the US Corporate Model be the Universal Standard? 1," International Review of Applied Economics, Taylor and Francis Journals, vol. 19(4), pages 419-437, October. [Downloadable!] (restricted)
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  12. Jong, Abe de & DeJong, Douglas V. & Mertens, Gerard & ...,, 2005. "Royal Ahold: a failure of corporate governance and an accounting scandal," Discussion Paper 57, Tilburg University, Center for Economic Research. [Downloadable!]
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  15. Gérard Charreaux, 2004. "Michael Jensen-la théorie positive de l’agence et ses applications à l’architecture et à la gouvernance des organisations," Working Papers FARGO 1041203, Université de Bourgogne - Latec/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
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