Agency Costs of Overvalued Equity

16 Pages Posted: 24 Apr 2005  

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

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Abstract

I define and analyze the agency costs of overvalued equity. They explain the dramatic increase in corporate scandals and value destruction in the last five years; costs that have totaled hundreds of billions of dollars. When a firm's equity becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage - forces that almost inevitably lead to destruction of part or all of the core value of the firm. WorldCom, Enron, Nortel, and eToys are only a few examples of what can happen when these forces go unmanaged. Because we currently have no simple solutions to the agency costs of overvalued equity this is a promising area for future research.

JEL Classification: G14, G34, M41, M43

Suggested Citation

Jensen, Michael C., Agency Costs of Overvalued Equity. Financial Management, Vol. 34, No. 1, Spring 2005. Available at SSRN: https://ssrn.com/abstract=704025

Michael C. Jensen (Contact Author)

Harvard Business School ( email )

Soldiers Field
Negotiations, Organizations & Markets
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HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

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United States

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