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Firm Value and Managerial Incentives: A Stochastic Frontier Approach

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Author Info
Michel A. Habib (Swiss Banking Institute, University of Zurich)
Alexander Ljungqvist (Salomon Center, Stern School of Business, New York University)

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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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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 6 (November)
Pages: 2053-2094
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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2053-2094

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stefan Beiner & Markus Schmid & Gabrielle Wanzenried, 2004. "Product Market Competition, Managerial Inventives, and Firm Valuation," Diskussionsschriften dp0412, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  2. Daniel Ferreira & Emanuel Ornelas & John L. Turner, 2005. "Ownership Structure and the Market for Corporate Control," IBMEC RJ Economics Discussion Papers 2005-09, Economics Research Group, IBMEC Business School - Rio de Janeiro. [Downloadable!]
  3. Jayesh Kumar, 2004. "Share holding Pattern and Firm Performance," Finance 0409008, EconWPA. [Downloadable!]
  4. William Greene, 2002. "Fixed and Random Effects in Stochastic Frontier Models," Working Papers 02-16, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
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