Measuring Agency Costs over the Business Cycle

Management Science 2018, 64(12), 5748-5768.

Posted: 22 Feb 2014 Last revised: 22 Dec 2019

Date Written: January 2, 2017


This paper investigates the joint effects of manager-shareholder agency conflicts and macroeconomic risk on corporate policies and firm value. I first derive the implications of a structural model of a firm with assets in place and an investment opportunity, run by a self-interested manager who captures part of the firm's net income as private benefits. The model implies that dynamic aggregate agency costs are driven by firms in the upper half of the distribution of private benefits. The managers of those firms capture 0.8% of firms' net income on average, thereby decreasing aggregate firm value by 1.7%. These agency costs are procyclical (1.9% in booms and 1.4% in recessions) because managerial underleverage decreases default costs particularly in recessions. Further, the model can explain empirical regularities, including the joint level and cyclicality of leverage.

Keywords: Agency Conflicts, Macroeconomic Conditions, Financing Policy, Investment Policy

JEL Classification: E44, G12, G31, G32, G34

Suggested Citation

Westermann, Ramona, Measuring Agency Costs over the Business Cycle (January 2, 2017). Management Science 2018, 64(12), 5748-5768., Available at SSRN: or

Ramona Westermann (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics