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Testing Agency Theory with Entrepreneur Effort and Wealth

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  • MARIANNE P. BITLER
  • TOBIAS J. MOSKOWITZ
  • ANNETTE VISSING‐JØRGENSEN

Abstract

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.

Suggested Citation

  • Marianne P. Bitler & Tobias J. Moskowitz & Annette Vissing‐Jørgensen, 2005. "Testing Agency Theory with Entrepreneur Effort and Wealth," Journal of Finance, American Finance Association, vol. 60(2), pages 539-576, April.
    • Handle: RePEc:bla:jfinan:v:60:y:2005:i:2:p:539-576
    DOI: 10.1111/j.1540-6261.2005.00739.x
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