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Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?

Author

Listed:
  • Matthias Kiefer
  • Edward Jones
  • Andrew Adams

    (Heriot-Watt University)

Abstract

Companies can be regarded as nexuses with contractual relationships between management and shareholders (Jensen and Meckling, 1976). The extent to which managerial and shareholder rewards are determined by incompleteness of contracts has been extensively studied (Hart, 1995a). Incomplete contracts affect the stability of the relationship between managers and shareholders as managers can leave or be dismissed (Oyer, 2004; Gillan, Hartzell, and Parrino, 2009). Furthermore, discretion for renegotiation of such contracts can be desirable, if stability is improved (Schwab and Thomas, 2006; Roberts and Sufi, 2009). Discretion for renegotiation of contracts between management and shareholders is increased in public companies when shareholders surrender control over management to boards (Blair and Stout, 1999; Peters and Wagner, 2014). Corporate stability, renegotiation of agreements and control rights over assets are not systematically captured by principal-agent models.

Suggested Citation

  • Matthias Kiefer & Edward Jones & Andrew Adams, 2016. "Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?," CFI Discussion Papers 1603, Centre for Finance and Investment, Heriot Watt University.
    • Handle: RePEc:hwe:cfidps:1603
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    More about this item

    Keywords

    Board Insulation; Executive Compensation; Incomplete Contracts; Managerial Labor Market; Market for Corporate Control; Principal-Agent Model.;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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