We are especially grateful to the editors (Hee-Joon Ahn, Kee H. Chung, and Bong-Soo Lee), J. Barry Lin, James L. Park, J. Qi, and Ninon Sutton for their many insightful and constructive suggestions. We appreciate helpful comments from participants in seminars at the University of South Florida, the 2013 Annual Conference on Asia-Pacific Financial Markets, the 2008 Eastern Finance Association Annual Meeting, and the 2007 Financial Management Association Annual Meeting.
Agency Costs and Equity Mispricing†
Article first published online: 12 MAR 2014
© 2014 Korean Securities Association
Asia-Pacific Journal of Financial Studies
Volume 43, Issue 1, pages 89–123, February 2014
How to Cite
Pantzalis, C. and Park, J. C. (2014), Agency Costs and Equity Mispricing. Asia-Pacific Journal of Financial Studies, 43: 89–123. doi: 10.1111/ajfs.12041
- Issue published online: 12 MAR 2014
- Article first published online: 12 MAR 2014
- Manuscript Accepted: 19 DEC 2013
- Manuscript Received: 30 SEP 2013
- Agency costs;
- Equity-based compensation;
- Equity mispricing
We investigate a link between agency costs and equity mispricing. We employ comprehensive, multi-dimensional measures of agency costs and mispricing, and find that mispricing is significantly and positively related to agency costs. We also explore the effect of equity-based compensation on the impact of agency costs on mispricing. Our investigation extends previous studies that do not separately account for the options and restricted stock grants components of equity-based compensation. We show that stock options, originally intended to resolve conflicts of interest, exaggerate the problem and this phenomenon is pronounced especially when firms are overvalued. Overall, our results imply that compensation packages that are not structured optimally could lead to greater mispricing.