Testing Dynamic Agency Theory via Structural Estimation
42 Pages Posted: 15 Mar 2012
Date Written: March 14, 2012
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
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