Measuring Agency Costs over the Business Cycle

Westermann, Ramona

doi:10.1287/mnsc.2017.2813

Cited by 16 publications

(7 citation statements)

References 106 publications

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“…However, consistent with Gaver (2003), “It is not clear that simply adding a book to market ratio to the discretionary accruals model completely addresses this concern” (588). Indeed, Westermann (2018) also criticizes the use of BTM as a reliable proxy for investment opportunities. We argue that industry and macroeconomic factors explain growth and profitability beyond firm‐level information.…”

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confidence: 99%

Risk‐Taking Incentives and Earnings Management: New Evidence*

Mayberry

Park

Tian

2021

Contemporary Accting Res

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We reexamine the positive association between stock option vega and earnings management previously documented by Armstrong, Larcker, Ormazabal, and Taylor (2013; henceforth, ALOT). In contrast to ALOT, prior empirical research and practitioner literature emphasizes earnings management's goals of increasing stock price and reducing volatility. Specifically, we assess whether the association is robust to (i) employing discretionary accruals that are less prone to misspecification, (ii) focusing on a more recent time period, and (iii) including additional controls for period-specific factors. Our main findings are as follows. First, we fail to find a positive association between vega and earnings management after controlling for performance-related misspecification in discretionary accruals. Second, we find no association between vega and earnings management in a more recent time period, suggesting the results of ALOT may be sensitive to period-specific factors. Last, the positive association vanishes when we control for year fixed effects, growth opportunities, or monitoring, suggesting the original results of ALOT's research may be sensitive to correlated, omitted variables. Overall, our results question the extent to which vega incentivizes earnings management. Our results may be of interest to boards of directors in designing executive compensation contracts, to regulators in crafting policies that maintain high levels of financial reporting quality, and to researchers seeking to identify settings where earnings management incentives are most salient.

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confidence: 99%

Risk‐Taking Incentives and Earnings Management: New Evidence*

Mayberry

Park

Tian

2021

Contemporary Accting Res

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“…(), and somewhere between Hennessy and Whited (12%), Moyen (14%) and Arnold (20%). For the tax rate, we use τ = 15%, as in Boileau and Moyen (), Arnold () and Westermann ().…”

Section: Resultsmentioning

confidence: 99%

Agency cost of debt overhang with optimal investment timing and size

Nishihara

Sarkar

Zhang

2019

Business Fin & Account

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The concept of debt overhang (that is, an equity-maximizing levered firm will under-invest relative to a firm-value-maximizing firm) is well established in the literature. A number of papers have demonstrated it as delayed investment (when investment size is specified) or smaller investment (when investment time is specified). However, there is no work on the underinvestment effect when the firm chooses both size and timing of investment, as it usually does in real life. This is what our paper focuses on. When the firm has the flexibility to choose both size and time, the effect is complicated by the fact that delayed investment results in larger investment, which suggests that the underinvestment problem might be mitigated. We find, however, that the effect depends on how underinvestment is measured. When measured by the expected present value of investment, flexibility can mitigate or exacerbate the underinvestment problem, depending on the cost of installing capacity. But when measured by the agency cost, flexibility always exacerbates the underinvestment problem. It is shown numerically that, at the optimal leverage ratio, the agency cost with plausible parameter values can be economically significant. Thus, with the flexibility of choosing both time and size of investment, the debt overhang problem can be of significant practical relevance in corporate investment decisions. K E Y W O R D S agency cost, contingent-claim model, debt overhang, investment flexibility, investment trigger, underinvestment INTRODUCTIONThis paper studies the debt overhang (or underinvestment) problem and the associated agency cost when a firm has the flexibility to choose both the timing and the size of its investment. Although there is a sizeable literature on debt overhang and its effect on corporate investment, the existing papers examine a firm's investment decision when it chooses either the investment timing (for given size) or the investment size (for given timing); examples are Chen and /journal/jbfa J Bus Fin Acc. 2019;46:784-809. LITERATUREAs mentioned above, a number of studies analyze the debt overhang problem when the investment size is specified and the firm chooses investment timing optimally. These studies show that the second-best investment trigger exceeds the first-best trigger, implying delayed investment or underinvestment. Mauer and Ott (2000) and Mello and Parsons (1992) demonstrate underinvestment but report very small agency costs. Pawlina (2010) also finds extremely small agency cost (except for the unusual scenario of negative growth), and shows that debt renegotiation in financial 1 It has been shown that firms that invest later choose a larger size or capacity, thus it is important to study the capacity decision next to the timing decision (

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“…In fact, we did not observe any rigorous efforts to operationalize agency costs in supply chain relations, though such attempts do exist in the corporate governance domain (cf. Westermann, 2018).…”

Section: Discussionmentioning

confidence: 99%

Making agency theory work for supply chain relationships: a systematic review across four disciplines

Matinheikki

Kauppi

Brandon‐Jones

et al. 2022

IJOPM

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PurposeContemporary supply chain relationships inherently rely on delegation of work between organizations and, thus, are subject to agency problems for which a wide range of governance mechanisms exist. This review of agency theory (AT), across four distinct fields, explains the connection between governance mechanisms and supply chain relationship types.Design/methodology/approachThe study uses a systematic literature review (SLR) of articles using AT in a supply chain context from the operations and supply chain management, general management, marketing, and economics fields.FindingsThe authors categorize the governance mechanisms identified to create a typology of agency relationships in supply chains.Research limitations/implicationsThe developed typology provides parsimonious theory on different forms of supply chain agency relationships and takes a step towards a “supply chain-oriented agency theory” explaining and predicting relationship types and governance in supply chains. Furthermore, a future research agenda calls for more accurate measuring of agency costs, to examine residual gains alongside residual losses, to take a dual-sided perspective of agency relations and to adopt AT to examine more complex supply networks.Practical implicationsThe review provides a menu of governance mechanisms and describes situations under which these mechanisms could be deployed to guide managers when developing their supply chain relationships.Originality/valueThe first review to combine and elaborate views from four major disciplines using AT as a lens to supply chain relationships. Expanding the traditional set of governance mechanisms provides academics and practitioners with a bigger “menu” of options to consider.

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Measuring Agency Costs over the Business Cycle

Cited by 16 publications

References 106 publications

Risk‐Taking Incentives and Earnings Management: New Evidence*

Risk‐Taking Incentives and Earnings Management: New Evidence*

Agency cost of debt overhang with optimal investment timing and size

Making agency theory work for supply chain relationships: a systematic review across four disciplines

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