Why Do Agency Theorists Misinterpret Market Monitoring?

34 Pages Posted: 19 Mar 2018 Last revised: 17 Apr 2018

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: April 2, 2018


Separation of ownership and control is the main governance problem facing the modern corporation (Adam Smith, 1776, Berle and Means, 1932, Jensen and Meckling, 1976). With no one to care for passive outside investors, large and liquid companies should not exist. I hypothesize that informed speculators fulfill this role by monitoring management. Indeed, in the manager’s optimal contract, I show that stock price weight (inside ownership) must fall with more informative stock prices and scale. Holmstrom and Tirole (1993) seems to rule out this monitoring explanation by its (false) finding that monitoring gives rise to high- not low-powered incentives.

Keywords: Pay-Performance Sensitivity, Governance Through Trading, Agency, Incentives, External Monitoring

JEL Classification: G34, J41, J44, L25

Suggested Citation

Swan, Peter Lawrence, Why Do Agency Theorists Misinterpret Market Monitoring? (April 2, 2018). Available at SSRN: https://ssrn.com/abstract=3142962 or http://dx.doi.org/10.2139/ssrn.3142962

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

HOME PAGE: http://www.firn.org.au

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