Agency Costs and the Size Discount: Evidence from Acquisitions
21 Pages Posted: 2 Dec 2010 Last revised: 30 Nov 2012
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Agency Costs and the Size Discount: Evidence from Acquisitions
Date Written: September 2, 2010
Abstract
Many scholars have found a negative relationship between a firm’s size and its value, as measured by Tobin’s q. This result is called the size discount. There are hypotheses about why the size discount exists, but none have been rigorously empirically tested. This paper argues that the size discount is created by the inability of shareholders to minimize agency costs in larger companies. Statistical tests suggest that the size discount only appears in large firms with managers that impose excessive agency costs upon their shareholders. Empiricists who use Tobin’s q to proxy for growth opportunities may need a different proxy.
Keywords: Agency costs, size discount, acquisitions, corporate governance
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