Agency Costs, Business Cycles, and Equity Prices

65 Pages Posted: 26 Aug 2019 Last revised: 15 Oct 2020

See all articles by Adelphe Ekponon

Adelphe Ekponon

University of Liverpool Management School

Date Written: August 21, 2019

Abstract

This paper develops a framework for studying the impact of time-varying agency conflicts on the cost of equity. Investors infer agency costs coming from these conflicts by observing a firm’s governance policy. They dislike stocks of firms with higher agency costs in bad times, because this amplifies these stocks volatility. I empirically test the model with two commonly used measures of corporate governance and study the implications for U.S. firms from 1990 to 2006. A higher index level implies more power to insiders and is interpreted as leading to more costs by outsiders. I find that firms with a higher index in bad compared to good times have a higher cost of equity (up to a 12% difference), even after controlling for prominent market factors, firm-specific financial and operating variables, and also replacing the indices by their IVs.

Keywords: Corporate Governance, Asset Pricing, Asymmetric information

JEL Classification: G12, G32, G32, G14

Suggested Citation

Ekponon, Adelphe, Agency Costs, Business Cycles, and Equity Prices (August 21, 2019). Available at SSRN: https://ssrn.com/abstract=3440168 or http://dx.doi.org/10.2139/ssrn.3440168

Adelphe Ekponon (Contact Author)

University of Liverpool Management School ( email )

HOME PAGE: http://sites.google.com/site/adelpheekponon/home

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