Agency Conflicts and Investment: Evidence from a Structural Estimation
57 Pages Posted: 13 Oct 2020 Last revised: 3 Jan 2022
Date Written: December 30, 2021
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.
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