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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. Copyright 2005 by The American Finance Association.

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
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