A Resource Based Interpretation of Performance Enhancing Capital Structure Changes : The O.M. Scott LBO Revisited
AbstractThe O.M. Scott case study published in 1989 in the Journal of Financial Economics has come to be a classic in illustrating the plausibility of some fundamental concepts that underpin mainstream models of the efficiency attributes of capital structure in modern corporate finance. In these models, high leverage traditionally appears as a strong incentive to refrain from sub-optimal investment behavior by self-interested managers. Thus reducing managerial agency cost has been considered as an essential driver of enhanced value in much of financial modeling. In the present paper, we attempt a somewhat different, albeit complementary, mainly resource based interpretation of the very rich empirical material contained in Baker and Wruck (1989). In fact, a close reading of the case suggests that the observed significant increase in operating performance post-LBO was to a great extent the consequence of the yet unexplored cognitive changes implied by switching dominant shareholders. Namely, we find that value at O.M. Scott was essentially increased by (1) a significant reduction in what may be termed cognitive agency costs while (2) the new dominant shareholder contributed substantial cognitive value by stimulating and advising a dynamic learning process leading to enforced managerial capabilities, especially with respect to more effective routines of cash management.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Post-Print with number halshs-00746277.
Date of creation: 08 Jun 2005
Date of revision:
Publication status: Published - Presented, FMA European Conference (Financial Management Association), 2005, Siena, Italy, Italy
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00746277
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
capital structure cognitive agency costs cognitive value managerial agency costs;
Other versions of this item:
- Peter Wirtz, 2003. "A resource based interpretation of performance enhancing capital structure changes: The O.M. Scott LBO revisited," Working Papers FARGO 1030302, Université de Bourgogne - Crego EA 7317/Fargo (Research center in Finance,organizational ARchitecture and GOvernance).
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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.:
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Zingales, Luigi, 2000.
"In Search of New Foundations,"
CEPR Discussion Papers
2551, C.E.P.R. Discussion Papers.
- Armen A. Alchian & Harold Demsetz, 1971.
"Production, Information Costs and Economic Organizations,"
UCLA Economics Working Papers
10A, UCLA Department of Economics.
- Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
- Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
- Richard N. Langlois, 1994. "Cognition and Capabilities: Opportunities Seized and Missed in the History of the Computer Industry," Industrial Organization 9406003, EconWPA.
- Jay B. Barney, 1986. "Strategic Factor Markets: Expectations, Luck, and Business Strategy," Management Science, INFORMS, vol. 32(10), pages 1231-1241, October.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 141-61, Spring.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.