Author : Raj Aggarwal
Publisher :
ISBN 13 :
Total Pages : 38 pages
Book Rating : 4.:/5 (247 download)
Book Synopsis Empire-builders and Shirkers by : Raj Aggarwal
Download or read book Empire-builders and Shirkers written by Raj Aggarwal and published by . This book was released on 1999 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Do firms systematically over- or underinvest as a result of agency problems? We develop a contracting model between shareholders and managers in which managers have private benefits or private costs of investment. Managers overinvest when they have private benefits and underinvest when they have private costs. Optimal incentive contracts mitigate the over- or underinvestment problem. We derive comparative static predictions for the equilibrium relationships between incentives from compensation, investment, and firm performance for both cases. The relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits or private costs of investment. In order to identify whether managers have private benefits or costs, we estimate the joint relationships between incentives and firm performance and between incentives and investment. Our empirical results show that both firm performance and investment are increasing in managerial incentives. These results are consistent with managers having private costs of investment. We find no support for overinvestment based on private benefits.