Advanced Search
MyIDEAS: Login to save this paper or follow this series

Firm Value and Managerial Incentives: A Stochastic Frontier Approach

Contents:

Author Info

  • Michel Habib
  • Alexander Ljungqvist

Abstract

We examine the relation between firm value and managerial incentives in a sample of 1,487 U.S. firms in 1992-1997, for which the separation of ownership and control is complete. Unlike previous studies, we employ a measure of relative performance which compares a firm’s actual Tobin’s Q to the Q of a hypothetical fully-efficientfirm having the same inputs and characteristics as the original firm. We find that the Q of the average firm in our sample is around 10% lower than its Q, equivalent to a $1,340 million reduction in its potential market value. We investigate what causes firms to fail to reach their Q and find that our firms are more efficient, the higher are CEO stockholdings and optionholdings and the more sensitive are CEO options to firm risk. We also show that boards respond to inefficiency by subsequently strengthening incentives or replacing inefficient CEOs.

Download Info

If 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.
File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2000fe03.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Maxine Collett)
Download Restriction: no

Bibliographic Info

Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2000fe03.

as in new window
Length:
Date of creation: 2000
Date of revision:
Handle: RePEc:sbs:wpsefe:2000fe03

Contact details of provider:
Email:
Web page: http://www.finance.ox.ac.uk
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  2. Kee H. Chung & Stephen W. Pruitt, 1994. "A Simple Approximation of Tobin's q," Financial Management, Financial Management Association, Financial Management Association, vol. 23(3), Fall.
  3. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  4. 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.
  5. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-11, Board of Governors of the Federal Reserve System (U.S.).
  6. Stevenson, Rodney E., 1980. "Likelihood functions for generalized stochastic frontier estimation," Journal of Econometrics, Elsevier, Elsevier, vol. 13(1), pages 57-66, May.
  7. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  8. Agrawal, Anup & Knoeber, Charles R., 1998. "Managerial compensation and the threat of takeover," Journal of Financial Economics, Elsevier, Elsevier, vol. 47(2), pages 219-239, February.
  9. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
  10. Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(2), pages 258-76, April.
  11. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, Elsevier, vol. 6(1), pages 21-37, July.
  12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  13. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics, University of Munich, Department of Economics 19772, University of Munich, Department of Economics.
  14. Scharfstein, David, 1988. "The Disciplinary Role of Takeovers," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(2), pages 185-99, April.
  15. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 653-691, August.
  16. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, Elsevier, vol. 48(2), pages 127-158, May.
  17. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 16(1-3), pages 273-315, April.
  18. McConnell, John J. & Servaes, Henri, 1995. "Equity ownership and the two faces of debt," Journal of Financial Economics, Elsevier, Elsevier, vol. 39(1), pages 131-157, September.
  19. Hunt-McCool, Janet & Koh, Samuel C & Francis, Bill B, 1996. "Testing for Deliberate Underpricing in the IPO Premarket: A Stochastic Frontier Approach," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1251-69.
  20. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(6), pages 1175-99, December.
  21. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 225-64, April.
  22. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, Elsevier, vol. 26(1), pages 3-27, July.
  23. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 377-397, September.
  24. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, American Finance Association, vol. 55(3), pages 1367-1384, 06.
  25. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(2), pages 193-229, June.
  26. Guay, Wayne R., 1999. "The sensitivity of CEO wealth to equity risk: an analysis of the magnitude and determinants," Journal of Financial Economics, Elsevier, Elsevier, vol. 53(1), pages 43-71, July.
  27. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, Springer, vol. 20(2), pages 325-32.
  28. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc.
  29. Stein, Jeremy C., 1988. "Takeover Threats and Managerial Myopia," Scholarly Articles 3708937, Harvard University Department of Economics.
  30. Reifschneider, David & Stevenson, Rodney, 1991. "Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 715-23, August.
  31. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  32. Stigler, George J & Friedland, Claire, 1983. "The Literature of Economics: The Case of Berle and Means," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 237-68, June.
  33. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  34. Benjamin E. Hermalin & Michael S. Weisbach, 1991. "The Effects of Board Composition and Direct Incentives on Firm Performance," Financial Management, Financial Management Association, Financial Management Association, vol. 20(4), Winter.
  35. John, Teresa A & John, Kose, 1993. " Top-Management Compensation and Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 48(3), pages 949-74, July.
  36. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 8-96, Wharton School Rodney L. White Center for Financial Research.
  37. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 293-315, January.
  38. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 8(1), pages 3-35, March.
  39. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  40. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, Elsevier, vol. 43(2), pages 153-193, February.
  41. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 595-612, October.
  42. Berger, Philip G & Ofek, Eli, 1999. "Causes and Effects of Corporate Refocusing Programs," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 311-45.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Quader, Manzur & Taylor, Karl, 2014. "Corporate Efficiency, Credit Status and Investment," IZA Discussion Papers 8285, Institute for the Study of Labor (IZA).
  2. Ingolf Dittmann & Ko-Chia Yu, 2009. "How Important Are Risk-Taking Incentives in Executive Compensation?," Tinbergen Institute Discussion Papers 09-076/2, Tinbergen Institute.
  3. Joseph P. Hughes & Loretta J. Mester, 2011. "Who said large banks don't experience scale economies? Evidence from a risk-return-driven cost function," Working Papers 11-27, Federal Reserve Bank of Philadelphia.
  4. Gormley, Todd A. & Matsa, David A. & Milbourn, Todd, 2013. "CEO compensation and corporate risk: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 56(2), pages 79-101.
  5. O'Connor, Matthew L. & Rafferty, Matthew, 2010. "Incentive effects of executive compensation and the valuation of firm assets," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(4), pages 431-442, September.
  6. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(3), pages 713-730, September.
  7. Joseph P. Hughes & Loretta J. Mester, 2013. "Measuring the performance of banks: theory, practice, evidence, and some policy implications," Working Papers 13-31, Federal Reserve Bank of Philadelphia.
  8. Bulan, Laarni & Sanyal, Paroma & Yan, Zhipeng, 2010. "A few bad apples: An analysis of CEO performance pay and firm productivity," Journal of Economics and Business, Elsevier, Elsevier, vol. 62(4), pages 273-306, July.
  9. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," NBER Working Papers 9813, National Bureau of Economic Research, Inc.
  10. Richard Chung & Scott Fung & Szu-Yin Hung, 2012. "Institutional Investors and Firm Efficiency of Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 45(1), pages 171-211, June.
  11. O’Connor, Matthew & Rafferty, Matthew & Sheikh, Aamer, 2013. "Equity compensation and the sensitivity of research and development to financial market frictions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2510-2519.
  12. Ezzeddine Ben Mohamed & Baccar Ame & Abdelfatteh Bouri, 2013. "Investment Cash Flow Sensitivity and Managerial Optimism: A Literature Review via the Classification Scheme Technique," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(1), pages 007-026, June.
  13. Beladi, Hamid & Quijano, Margot, 2013. "CEO incentives for risk shifting and its effect on corporate bank loan cost," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 182-188.
  14. Jayesh Kumar, 2004. "Share holding Pattern and Firm Performance," Finance, EconWPA 0409008, EconWPA.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sbs:wpsefe:2000fe03. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.