Monthly ArchiveOctober 2014

Executive Compensations to Address Agency Problems and the Income Strategy Impact

The general acceptance of the agency theory and the parallel research on executive compensation began in the early 1980s.



It was the evolution of the modern corporation with ownership separation and control that undermined the agency theory. Early studies in this area focused on documenting the relation between CEO pay and firm performance. The discussion of executive compensation must proceed with the fundamental agency problem afflicting management decision-making as background. According to Jensen and Murphy (1990), there is an optimal contracting approach, which is when boards use design compensation schemes to maximize shareholder value with efficient incentives (Jensen and Murphy 1990).

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Acquisition Values and Optimal Financial (In)Flexibility

According to conventional wisdom, the deep pockets of an incumbent serve to deter entry. In large part, the theoretical basis for this view rests upon the model of Bolton and Scharfstein (1990), who show that an unconstrained cashrich incumbent can fund predation in order to increase the likelihood of venture capitalists terminating projects.

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A Financing-Based Misvaluation Factor and the Cross-Section of Expected Returns

Several recent behavioral models predict commonality in the misvaluation of firms. In the style investing approach of Barberis and Shleifer (2003), commonality in misvaluation arises when irrational investor enthusiasm for stock characteristics shifts, inducing positive comovement among stocks with similar characteristics and negative comovement in stocks with dissimilar characteristics.

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