Measuring Agency Costs over the Business Cycle
Social Science Research Network
This paper investigates the effects of manager-shareholder agency conflicts on corporate policies in a structural model with intertemporal macroeconomic risk. In the model, a firm consists of assets in place and a growth option, and is run by a self-interested manager who receives part of the firm's free cash flows as private benefits. Fitting the model, parameter estimates imply substantial agency costs due to managerial diversion at initiation (around 3%), and higher agency costs for growth
... costs for growth firms than for value firms (3.45% vs. 1.77%). Further, aggregate dynamic agency costs are strongly procyclical (on average, 2.31% in boom and 0.95% in recession periods). The reason for the latter observation is that, in times of recession, firms profit from managerial underleverage, which increases the distance to costly default. Finally, the model also generates predictions regarding default and investment rates, as well as on the intertemporal pattern of investment. * I am grateful to Erwan Morellec for advice.