Testing Dynamic Agency Theory via Structural Estimation

Boris Nikolov, Lukas Schmid
2012 Social Science Research Network  
We quantify agency conflicts induced by the separation of ownership and control in large public firms by means of structural estimation. We use a simulated method of moments estimator (SMM) to back out the structural parameters of a q-theoretic dynamic agency model of firms from observed financing and investment choices. In the model, an optimal contract resolves the agency conflict between investors and managers, which can be implemented using cash, debt and equity. Our estimates suggest that
more » ... mates suggest that in order to rationalize observed firm financing and investment policies, the agency conflict between investors and managers needs to be substantial. We provide additional cross-sectional tests based on sample splits according to governance and firm characteristics.
doi:10.2139/ssrn.2022605 fatcat:zefizgkmynbctgsyw53ntqlu54