Relationship Investing: Large Shareholder Monitoring with Managerial Cooperation
We characterize conditions under which a large institutional shareholder and the manager of a firm will establish relationship investing, wherein the manager actively cooperates with the institution in the monitoring process, to resolve agency problems. The setting of our model is that of a privately informed manager choosing between a project that has a faster resolution of uncertainty and a project that has a delayed resolution of uncertainty. The agency problem arises because the manager has incentives to focus on the firm's perceived market value, rather than its true long-term value, through his compensation contract and leads to investment distortions. We show that relationship investing solves the agency problem and reduces the free-riding problem associated with large shareholder monitoring. We also show that under some conditions it is optimal for shareholders to make the manager's compensation more distortionary by increasing the manger's incentives to focus on the firm's perceived market value, in order to induce him to cooperate in the monitoring process.
|Date of creation:||Nov 1998|
|Date of revision:|
|Contact details of provider:|| Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126|
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenneth A. Froot & Andre F. Perold & Jeremy C. Stein, 1991.
"Shareholder Trading Practices and Corporate Investment Horizons,"
NBER Working Papers
3638, National Bureau of Economic Research, Inc.
- Kenneth A. Froot & Andre F. Perold & Jeremy C. Stein, 1992. "Shareholder Trading Practices And Corporate Investment Horizons," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 42-58.
- A. Admati & P. Pßeiderer & J. Zechner, 2005.
"Large shareholder activism, risk sharing, and financial market equilibrium,"
- Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994. "Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1097-1130, December.
- Barclay, Michael J. & Holderness, Clifford G., 1989. "Private benefits from control of public corporations," Journal of Financial Economics, Elsevier, vol. 25(2), pages 371-395, December.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Philip H. Dybvig & Jaime F. Zender, 1988.
"Capital Structure and dividend Irrelevance with Asymmetric Information,"
Cowles Foundation Discussion Papers
878, Cowles Foundation for Research in Economics, Yale University.
- Dybvig, Philip H & Zender, Jaime F, 1991. "Capital Structure and Dividend Irrelevance with Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 201-19.
- Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
- John, Teresa A & John, Kose, 1993. " Top-Management Compensation and Capital Structure," Journal of Finance, American Finance Association, vol. 48(3), pages 949-74, July.
- Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
- Bernard S. Black, 1992. "Institutional Investors And Corporate Governance: The Case For Institutional Voice," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(3), pages 19-32.
- Charles Kahn & Andrew Winton, 1998. "Ownership Structure, Speculation, and Shareholder Intervention," Journal of Finance, American Finance Association, vol. 53(1), pages 99-129, 02.
- Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
When requesting a correction, please mention this item's handle: RePEc:fth:nystfi:98-044. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If references are entirely missing, you can add them using this form.