Testing Dynamic Agency Theory via Structural Estimation

42 Pages Posted: 15 Mar 2012

See all articles by Boris Nikolov

Boris Nikolov

University of Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Lukas Schmid

University of Southern California - Marshall School of Business

Date Written: March 14, 2012

Abstract

We quantify agency conflicts induced by the separation of ownership and control in large public firms by means of structural estimation. We use a simulated method of moments estimator (SMM) to back out the structural parameters of a q-theoretic dynamic agency model of firms from observed financing and investment choices. In the model, an optimal contract resolves the agency conflict between investors and managers, which can be implemented using cash, debt and equity. Our estimates suggest that in order to rationalize observed firm financing and investment policies, the agency conflict between investors and managers needs to be substantial. We provide additional cross-sectional tests based on sample splits according to governance and firm characteristics.

Keywords: Dynamic agency, q-theory, dynamic contracting, managerial compensation, structural estimation, capital structure

Suggested Citation

Nikolov, Boris and Schmid, Lukas, Testing Dynamic Agency Theory via Structural Estimation (March 14, 2012). Simon School Working Paper No. FR 12-06, AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2022605 or http://dx.doi.org/10.2139/ssrn.2022605

Boris Nikolov

University of Lausanne ( email )

Lausanne, CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Lukas Schmid (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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