Agency Conflicts and Investment: Evidence from a Structural Estimation

57 Pages Posted: 13 Oct 2020 Last revised: 3 Jan 2022

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Daniel Kim

University of Waterloo

Chanik Jo

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Marco Salerno

Healthcare of Ontario Pension Plan Trust Fund

Date Written: December 30, 2021

Abstract

We develop a dynamic capital structure model to study how manager-shareholders agency conflicts affect the joint determination of financing and investment decisions. We show that there are two agency conflicts with opposing effects on a manager's choice of investment: (a) the consumption of private benefits channel leads managers not only to choose a lower optimal leverage, but also to underinvest, (b) compensation linked to firm size may lead managers to overinvest. We fit the model to the data and show that the average firm slightly overinvests, younger CEOs invest more than older ones, small firms underinvest, while CEOs with longer tenure overinvest more than CEOs with smaller tenure.

Suggested Citation

Elkamhi, Redouane and Kim, Daniel and Jo, Chanik and Salerno, Marco, Agency Conflicts and Investment: Evidence from a Structural Estimation (December 30, 2021). Available at SSRN: https://ssrn.com/abstract=3680008 or http://dx.doi.org/10.2139/ssrn.3680008

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Daniel Kim

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Chanik Jo

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Marco Salerno (Contact Author)

Healthcare of Ontario Pension Plan Trust Fund ( email )

1 York
Toronto, Ontario M5S 3G8
Canada

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
167
Abstract Views
1,178
Rank
316,123
PlumX Metrics