Influence Costs and Capital Structure

Bagwell, Laurie Simon; Zechner, Josef

doi:10.2307/2329023

Cited by 15 publications

(13 citation statements)

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“…Yet we observe that managers often retain their jobs without making such investments; they are rehired even when they select assets for which their own idiosyncratic talents are not the best match. We suggest that these managers may preserve their jobs by investing in activities for which information asymmetries are particularly large (our arguments are in the same spirit as Laurie S. Bagwell and Josef Zechner [1993]). In our theory, managers invest to create these asymmetries, not to exploit their talents.…”

mentioning

confidence: 69%

Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies

Edlin¹,

Stiglitz²

2008

40 Years of Research on Rent Seeking 2

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Managerial theories of the firm have a long and controversial history, beginning perhaps with Adolf A. Berle, Jr. and Gardiner C. Means's classic (1932) study. Such theories postulated that managers had considerable discretion running corporations and exercised it to pursue objectives other than maximizing shareholder market value. Critics later denied that managers really have discretion, arguing that such behavior could not survive in equilibrium. Either management would be voted from office, the firm would be taken over, or the firm would go bankrupt in a competitive product market. The more recent literature on information economics emasculated these criticisms. Managers are important to corporate decision-making because of their expertise and the information they acquire about the firm and its prospects. Yet the very information asymmetries that create a need for management also limit the discipline that the board of directors can impose on managers. At the same time, neither the shareholder-voting mechanism nor the takeover mechanism provides effective discipline.' Small shareholders free ride on the

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confidence: 69%

Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies

Edlin¹,

Stiglitz²

2008

40 Years of Research on Rent Seeking 2

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“…As we will argue below, the first inequality ensures that eliciting high effort is optimal. 8 Since the first inequality also implies that E[s | θ] > V , it follows from strict monotonicity and continuity of E[s | θ] that there exists a unique interior cutoff 5 See, e.g., Bagwell and Zechner (1993), Edlin and Stiglitz (1995), and Fulghieri and Hodrick (2006). 6 There is no need to make distributional assumptions about V .…”

Section: Technology and Beliefsmentioning

confidence: 99%

CEO Replacement Under Private Information

2010

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We study a model of "information-based entrenchment" in which the CEO has private information that the board needs to make an efficient replacement decision. Eliciting the CEO's private information is costly, as it implies that the board must pay the CEO both higher severance pay and higher on-the-job pay. While higher CEO pay is associated with higher turnover in our model, there is too little turnover in equilibrium. Our model makes novel empirical predictions relating CEO turnover, severance pay, and on-the-job pay to firm-level attributes such as size, corporate governance, and the quality of the firm's accounting system. * We thank

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“…Our work addresses not only a new setting with conflict theory (bankruptcy, financial distress, creditors, and non-linear debt payoff functions), but also how ex-ante choice of claimant identity can reduce ex-post conflict costs. Our work is also related to influence costs (e.g., Milgrom and Roberts (1990)), and extended to capital structure in Bagwell and Zechner (1993). Rajan and Zingales (1995) consider how the search for power among divisions can result either in a destructive or a constructive rat-race.…”

Section: Related Literaturementioning

confidence: 99%