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Firm Value and Managerial Incentives: A Stochastic Frontier Approach

Author

Listed:
  • Michel A. Habib

    (Swiss Banking Institute, University of Zurich)

  • Alexander Ljungqvist

    (Salomon Center, Stern School of Business, New York University)

Abstract

We provide a direct estimate of the magnitude of agency costs in publicly held corporations. We compute an explicit performance benchmark that compares a firm's actual Tobin's Q to the Q* of a hypothetical value-maximizing firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 16% below its Q*, equivalent to a $1,432 million reduction in its potential market value. We relate the shortfall to the incentives provided CEOs. Boards appear to grant CEOs too few shares and too many options that are insufficiently sensitive to firm risk.

Suggested Citation

  • Michel A. Habib & Alexander Ljungqvist, 2005. "Firm Value and Managerial Incentives: A Stochastic Frontier Approach," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2053-2094, November.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2053-2094
    DOI: 10.1086/497040
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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