Managerial Value Diversion and Shareholder Wealth
AbstractThe agents to whom shareholders delegate the management of corporate affairs may transfer value from shareholders to themselves through a variety of mechanisms, such as self-dealing, insider trading, and taking of corporate opportunities. A common view in the law and economics literature is that such value diversion does not ultimately produce a reduction in shareholder wealth, since value diversion simply substitutes for alternative forms of compensation that would otherwise be paid to managers. We question this view within its own analytical framework by studying, in a principal-agent model, the effects of allowing value diversion on managerial compensation and effort. We suggest that the standard law and economics view of value diversion overlooks a significant cost of such behavior. Many common modes of compensation can provide managers with incentives to enhance shareholder value; replacing such compensation would reduce these incentives. As a result, even if the consequences of a rule permitting value diversion can be fully taken into account in settling managerial compensation, such a rule might still produce a reduction in shareholder wealth -- and would not do so only if value diversion would have some countervailing positive effects (a possibility which our model considers) that are sufficiently significant in size.
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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6919.
Date of creation: Apr 2000
Date of revision:
Publication status: published as Journal of Law, Economics & Organization, vol. 15, no. 2, (July 1999): 487-502
Note: CF LE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-02-15 (All new papers)
- NEP-CFN-1999-02-15 (Corporate Finance)
- NEP-MIC-1999-02-15 (Microeconomics)
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.:
- Noe, Thomas H, 1997.
"Insider Trading and the Problem of Corporate Agency,"
Journal of Law, Economics and Organization,
Oxford University Press, vol. 13(2), pages 287-318, October.
- Thomas H. Noe, 1995. "Insider trading and the problem of corporate agency," Working Paper 95-2, Federal Reserve Bank of Atlanta.
- Alexander Dyck & Luigi Zingales, 2002.
"Private Benefits of Control: An International Comparison,"
NBER Working Papers
8711, National Bureau of Economic Research, Inc.
- Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, vol. 59(2), pages 537-600, 04.
- Dyck, Alexander & Zingales, Luigi, 2002. "Private Benefits of Control: An International Comparison," CEPR Discussion Papers 3177, C.E.P.R. Discussion Papers.
- Mason, Charles F. & Gottesman, Aron A. & Prevost, Andrew K., 2003. "Shareholder intervention, managerial resistance, and corporate control: a Nash equilibrium approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 466-482.
- Lerong He & Shih-Jen Ho, 2011. "Monitoring Costs, Managerial Ethics and Corporate Governance: A Modeling Approach," Journal of Business Ethics, Springer, vol. 99(4), pages 623-635, April.
- Michael Carney & Eric Gedajlovic & Sujit Sur, 2011. "Corporate governance and stakeholder conflict," Journal of Management and Governance, Springer, vol. 15(3), pages 483-507, August.
- Paolo, Santella & Carlo, Drago & Giulia, Paone, 2007. "Who cares about Director Independence?," MPRA Paper 2288, University Library of Munich, Germany.
- Frédéric Demerens & Dorra Najar & Jean-Louis Paré & Jean Redis, 2013. "Typology of stock market offenses in France: An analysis of sanctions by the AMF since 2006," Post-Print hal-00992928, HAL.
- Cassell, Cory A. & Huang, Shawn X. & Manuel Sanchez, Juan & Stuart, Michael D., 2012. "Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies," Journal of Financial Economics, Elsevier, vol. 103(3), pages 588-610.
- FrÃ©dÃ©ric Demerens & Dorra Najar & Jean-Louis ParÃ© & Jean Redis, 2014. "Typology of stock market offenses in France- An analysis of sanctions by the AMF since 2006," Working Papers 2014-072, Department of Research, Ipag Business School.
- repec:hal:journl:halshs-00441911 is not listed on IDEAS
- David Howden, 2014. "Knowledge flows and insider trading," The Review of Austrian Economics, Springer, vol. 27(1), pages 45-55, March.
- Bernard Yeung & Randall Morck & Daniel Wolfenzon, 2004.
"Corporate Governance, Economic Entrenchment and Growth,"
04-21, New York University, Leonard N. Stern School of Business, Department of Economics.
- Randall Morck & Daniel Wolfenzon & Bernard Yeung, 2004. "Corporate Governance, Economic Entrenchment and Growth," NBER Working Papers 10692, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.