Firm Value and Managerial Incentives: A Stochastic Frontier Approach

58 Pages Posted: 21 Dec 2000

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Michel A. Habib

University of Zurich; Swiss Finance Institute

Date Written: October 16, 2003

Abstract

We provide a direct estimate of the magnitude of agency costs in publicly-held corporations. We compute an explicit performance benchmark that compares a firm's actual Tobin's Q to the Q* of a hypothetical value-maximizing firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 16% below its Q*, equivalent to a $1,432 million reduction in its potential market value. We relate the shortfall in value to the incentives provided to CEOs. Boards appear to grant CEOs too few shares and too many options which are insufficiently sensitive to firm risk.

JEL Classification: G32 G34

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Habib, Michel A., Firm Value and Managerial Incentives: A Stochastic Frontier Approach (October 16, 2003). Available at SSRN: https://ssrn.com/abstract=252375 or http://dx.doi.org/10.2139/ssrn.252375

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michel A. Habib

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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