Seminar with Ramona Westermann, Swiss Finance Institute, University of Geneva

Upcoming Finance Seminar with Ramona Westermann, Swiss Finance Institute, University of Geneva

 
Friday, January 18, 2013 - 11:00 to 12:15

Upcoming Finance Seminar with Ramona Westermann, Swiss Finance Institute, University of Geneva

Ramona Westermann will be presenting:

Measuring Agency Costs over the Business Cycle

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 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.

The page was last edited by: Department of Finance // 04/15/2013