Agency Conflicts, Investment, and Asset Pricing

Corporations in most countries are run by controlling shareholders whose cash flow rights are substantially smaller than their control rights in the firm. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of outside minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic stochastic general equilibrium asset pricing model that acknowledges the implications of agency conflicts through imperfect investor protection on security prices. We show that countries with weaker investor protection have more overinvestment, lower market-to-book equity values, larger expected equity returns and return volatility, higher dividend yields, and higher interest rates. These predictions are consistent with empirical findings. We develop new predictions: countries with high investment-capital ratios have both higher variance of GDP growth and higher variance of stock returns. We provide evidence consistent with these hypotheses. Finally, we show that weak investor protection causes significant wealth redistribution from outside shareholders to controlling shareholdersinvestment, asset pricing, investor protection

Determinants of director compensation in two-tier systems: evidence from German panel data

Building on a unique panel data set of German Prime Standard companies for the period 2005-2008, this paper investigates the influencing factors of both director compensation levels and structure, i.e. the probability of performance-based compensation. Drawing on agency theory arguments and previous literature, we analyze a comprehensive group of determinants, including detailed corporate performance, ownership and board characteristics. While controlling for unobserved heterogeneity, we find director compensation to be set in ways consistent with optimal contracting theory. I.e. compensation is systematically structured to mitigate agency conflicts and to encourage effective monitoring. Thus, our results indicate that similar types of agency conflicts exist in the German two-tier setting. --Director Compensation,Corporate Governance,Outside Directors,Two-tier System,Agency Costs

Agency Conflicts, Asset Substitution, and Securitization

Asset-backed securities represent one of the largest and fastest growing financial markets. Under securitization, agents perform functions (for fees) that would alternatively be performed by a vertically integrated lender with ownership of a whole loan. We examine how outsourcing impacts performance using data on 357 commercial mortgage-backed securities deals with over 46,000 individual loans. To alleviate agency conflicts in managing troubled loans, underwriters often sell the first-loss position to the special servicer, the party who is charged with handling delinquencies and defaults. When holding the first-loss position, special servicers appear to behave more efficiently, making fewer costly transfers of delinquent loans to special servicing, but liquidating a higher percentage of loans that are referred to special servicing. Special servicers are also more likely to own the first loss position in deals that require additional effort (deals with higher delinquencies). Market pricing reflects the existence of agency costs. Despite the apparent reduction of agency costs, the first-loss position is increasingly owned by a party other than the special servicer. We pose a number of explanations, including conflicts between junior and senior securities holders (the asset substitution problem) and risk aversion among special servicers. Consistent with asset substitution, we show that special servicers delay liquidation when they hold the first-loss position in deals with more severe delinquency problems.

Agency Conflicts, Investment, and Asset Pricing

The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premium, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22 percent, a gain for which outside shareholders are willing to pay 11 percent of their capital stock.

Bringing the Provinces Back In: Creating a Federated Canadian Charities Council

Canadian charities need a new regulatory system. Currently, charities are regulated primarily at the federal level by the Canada Revenue Agency (CRA). But because charities, by virtue of the donation tax credit, can reduce the tax base, the CRA’s regulating them conflicts with its mandate to protect the tax base.Canada Revenue Agency (CRA), charities, charitable sector

Conflicts and Financial Collapse: The Problem of Secondary-Management Agency Costs

Corporate governance scholarship has long focused on conflicts of interest between firms and their top executive officers. This Essay contends that increasing leverage and financial complexity make it important for scholars to also focus on conflicts of interest between firms and their secondary managers

Agency problems and goal conflicts

Agency theory is used to evaluate how the European Union (EU) may deal with the resolution of goal and agency conflicts in dealing with failing financial institutions. Experience in the United States suggests that the financial and regulatory structure being put in place, which relies upon country-sponsored deposit insurance funds and home country responsibility for supervision and lender-of-last-resort functions, is not likely to be robust to the failure of a large EU institution that threatens the solvency of the deposit insurance fund or that poses systemic risk. The author concludes that the EU needs a centralized and common approach to dealing with troubled institutions

Investment Timing, Liquidity, and Agency Costs of Debt

This paper examines the effect of debt and liquidity on corporate investment in a continuous- time framework. We show that stockholder-bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debtinvestment timing; liquidity; agency costs of debt; capital structure; real options

Agency Conflicts, Financial Distress, and Syndicate Structure: Evidence from Japanese Borrowers

We examine how borrower firm characteristics affect the size structure in the Japanese syndicated loan market for the 1999-2003 period. Consistent with the view by Lee and Mullineaux (2004), we find that syndicates are smaller when borrowers have higher credit risk, while firms with greater information asymmetry are associated with larger syndicates in Japan. These results are primarily driven by nonkeiretsu (non-business group) firms. This suggests that the role of enhanced monitoring and facilitated renegotiation is especially useful for banks participating in Japanese syndicated loan for non-keiretsu firms. On the other hand, information problems seem to be less severe for keiretsu (business group) firms which tend to have easier access to syndicated loan via the intermediation of in-house banks in the relevant syndicate. Finally, we find that keiretsu (non-keiretsu) firms have less (more) fraction of loan by their agent banks as the maturity rises. It appears that main banks of keiretsu firms with informational advantage are likely to retain less of the loan and form a more dispersed syndicate to "signal' that the loan is of high quality with increased maturity. This further confirms the view that information problems are less severe in the keiretsu firms.

Principal-principal conflicts: Is it a big problem in ASEAN 4 markets?

This paper examines the issue of principal-principal (PP) conflicts in large public listed companies in four ASEAN countries. The PP conflicts are regarded as a major problem in emerging markets and have attracted considerable attention. The percentage of cash dividend of total assets is used to measure the expropriation depicted in PP conflicts. A sample of companies with total assets of US$1 billion are filtered to select those with single/multiple block holders of shareholdings concentration equal to or greater than five percent. A regression model is estimated with PP conflicts as the dependent variable. The findings confirm the existence of PP conflicts, suggesting that large shareholders do expropriate company wealth by paying higher cash dividends. This expropriation occurs through agency perspective and makes it apparent that PP conflicts are a major problem in ASEAN markets