Handout8A - Theory and the Real World Kaplan and Strmberg...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Theory and the Real World Kaplan and Strömberg (2003) 1.Cash Flow Rights (Principal-Agent Theory) 2.Control Rights (Incomplete Contract Theory) 3.Liquidation Rights (Debt Theory) Corporate Finance © Professor Ho-Mou Wu 8A-1 Spring 2004
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Principal-Agent Theory Holmstrom (1979): Incentive Contracts The manager exerts effort a , but only is observable. In order to overcome the moral hazard problem, an incentive compensation s(x) is provided (Handout 3A). Under some general conditions, one can show that s’(x)>0 . The incentive contract should also be contingent on as many signals correlated with effort as possible (the “Informativeness Principle” of Holmstrom). Corporate Finance Spring 2004 © Professor Ho-Mou Wu 8A-2 θ a x + =
Background image of page 2
Principal-Agent Theory: Empirical Findings These two implications of the principal-agent theory are supported by the empirical findings (Tables 2 and 3). In addition, it is found that lower powered incentives are provided as asymmetric information declines, consistent with the principal-agent theory. (Repeat EN, months since the first financing round………). Also, as performance signals become noisier, the contracts
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/23/2011 for the course FGB 780 taught by Professor Edwardchang during the Spring '09 term at Missouri State University-Springfield.

Page1 / 10

Handout8A - Theory and the Real World Kaplan and Strmberg...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online