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The effects of managerial discretion on moral hazard related behaviour: German evidence on agency costs

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  • Christian Engelen

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Abstract

Based on a sample of German quoted firms in the period 2006–2010 this paper measures the impact of managerial incentives, entrenchment and blockholder monitoring on managerial behaviour typically associated with moral hazard. This is motivated by the observation that while typically the German institutional environment is characterised by the type-II conflict between large and dispersed investors, a number of regulatory and behavioural changes suggest that the issue of managerial leeway and complacency has gained in importance. I find that managerial entrenchment as proxied by excess compensation is associated with higher agency costs, i.e. lower asset turnover and higher discretionary expense ratio and acquisition activity, respectively. In contrast, there is no evidence of an incentive alignment effect of long-term compensation components. Concerning blockholder influence, while general blockholder presence has inconclusive effects, the presence of a blockholder belonging to the traditionally influential group of families, strategic investors and banks is significantly associated with lower agency costs. However, the presence of any other blockholder is associated with higher agency costs stemming from managerial discretion. Overall, this partly conforms to the hypothesis that German corporate governance may be changing in that the problem of managerial complacency and entrenchment has gained in importance; at the same time dominant blockholders still seem to exert influence on corporate policy. Copyright Springer Science+Business Media New York 2015

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  • Christian Engelen, 2015. "The effects of managerial discretion on moral hazard related behaviour: German evidence on agency costs," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(4), pages 927-960, November.
  • Handle: RePEc:kap:jmgtgv:v:19:y:2015:i:4:p:927-960
    DOI: 10.1007/s10997-014-9298-5
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    1. Ozlem KUTLU FURTUNA, 2016. "The Nexus between Discretionary Expenditures and Corruption: Industry Level Perspectives from BRIC and Turkey," Proceedings of Business and Management Conferences 4406932, International Institute of Social and Economic Sciences.

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    Keywords

    Agency costs; Compensation; Corporate governance; Ownership; G3; G34; L25;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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