Measuring Agency Costs over the Business Cycle

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This paper investigates the joint effects of manager–shareholder agency conflicts and macroeconomic risk on corporate policies and firm value. I first derive the implications of a structural model of a firm with assets in place and an investment opportunity, run by a self-interested manager who captures part of the firm’s net income as private benefits. The model implies that dynamic aggregate agency costs are driven by firms in the upper half of the distribution of private benefits. Managers of those firms capture 0.8% of firms’ net income on average, thereby decreasing aggregate firm value by 1.7%. These agency costs are procyclical (1.9% in booms and 1.4% in recessions) because managerial underleverage decreases default costs particularly in recessions. Furthermore, the model can explain empirical regularities, including the joint level and cyclicality of leverage.
Original languageEnglish
JournalManagement Science
Issue number12
Pages (from-to)5748-5768
Number of pages21
Publication statusPublished - Dec 2018

Bibliographical note

Published online: 18 September 2017


  • Agency conflicts
  • Macroeconomic conditions
  • Financing policy
  • Investment policy

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