Measuring the Agency Costs of Dispersed Ownership: The Case of Repurchase Initiations

Abstract

Empirical investigations of the agency costs of dispersed ownership yield mixed results. A possible explanation for the lack of conclusive evidence is inaccurate measurement of the extent of the problem. We suggest that the extent of the problem be measured as theory suggests: by the wealth managers commit to their firms. We examine the relative performance of the different measures of the agency problem of dispersed ownership in the context of changes in payout policy affected by repurchase initiations. We find that the suggested measure - managerial equity wealth - performs better than the other measures: the proposed measure of the problem explains better than any other measure the market reaction to repurchase initiations. Our results are robust to several modifications of the main test.

Keywords: Agency cost, equity wealth, payout policy, repurchases

JEL Classification: G32, G35