Testing Agency Theory with Entrepreneur Effort and Wealth
We develop a principal-agent model in an entrepreneurial setting and test the model's predictions using unique data on entrepreneurial effort and wealth in privately held firms. Accounting for unobserved firm heterogeneity using instrumental-variables techniques, we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk; effort increases with ownership; and effort increases firm performance. The magnitude of the effects in the cross-section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity. Copyright 2005 by The American Finance Association.
Volume (Year): 60 (2005)
Issue (Month): 2 (04)
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