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Negative agency costs

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Abstract

Managerial opportunism is commonly considered destructive for the parties involved in an agency relationship. Using a game formulation derived from Jensen and Meckling’s equity model, we consider an agency relationship between a manager and an investor, where the manager can extract private benefits. The outside investor is assumed to benefit from funding opportunities in the banking sector at rate \(r\). For high levels of the rate of interest, we prove that the agency costs are negative irrespective of whether the manager or the investor acts as the leader in the agency relation. These results suggest that external conditions may have a differentiated impact on the ex ante and ex post inefficiencies created by managerial opportunism.

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Notes

  1. Utility \(U\) measures the preferences of the manager for two types of benefits considered as microeconomic goods. It is not a Von Neumann–Morgenstern utility function expressing the risk behavior of the manager. Since the manager is assumed to be risk neutral, the arguments of utility function \(U\) to be considered are the expected values of the benefits.

  2. It is worth mentioning that \(M_{A},M_{B},K_{A}\) and \(K_{B}\) do not depend on the interest rate \(r.\)

  3. Following the remark by Jensen and Meckling (footnote 21, p. 317), the value of the firm (including the managerial rights) when the manager receives a mix of benefits \(\left( V,F\right) \) is \(W\) such that \( U(W,0)=U(V,F).\) Under the separable specification (16), we merely have \(W=U(V,F).\)

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Authors and Affiliations

  1. EM Strasbourg Business School, 61, avenue de la Forêt Noire, 67085 , Strasbourg cedex, France

    Jacques Thépot

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  1. Jacques Thépot
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Correspondence to Jacques Thépot.

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Thépot, J. Negative agency costs. Theory Decis 78, 411–428 (2015). https://doi.org/10.1007/s11238-014-9427-2

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  • DOI: https://doi.org/10.1007/s11238-014-9427-2

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