Agency Costs and the Underlying Causes of Mispricing

47 Pages Posted: 21 Jan 2008

See all articles by Christos Pantzalis

Christos Pantzalis

University of South Florida

Jung Chul Park

University of South Florida

Date Written: January 20, 2008

Abstract

We investigate the link between agency costs and equity mispricing. We find that mispricing is positively related with agency costs caused by divergent objectives between agents and owners in the presence of information asymmetry where managers discriminately have better/more information than owners. Our investigation extends previous studies arguing that information asymmetry is simply a key determinant of mispricing. We show that, for a given level of information asymmetry, conflicts of interest can substantially exacerbate mispricing. Furthermore, we find that stock option grants, originally intended to resolve conflicts of interest, actually exaggerate this problem, and thus lead to greater mispricing.

Keywords: Agency costs, equity mispricing, stock options

JEL Classification: G12, G14, D82, J33

Suggested Citation

Pantzalis, Christos and Park, Jung Chul, Agency Costs and the Underlying Causes of Mispricing (January 20, 2008). Available at SSRN: https://ssrn.com/abstract=1085934 or http://dx.doi.org/10.2139/ssrn.1085934

Christos Pantzalis

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

Jung Chul Park (Contact Author)

University of South Florida ( email )

Tampa, FL 33620
United States
813-974-9680 (Phone)
813-974-3084 (Fax)

HOME PAGE: http://usf.edu/business/about/bios/park-jung-chul.aspx

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