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Keywords:

  • manager-owner and shareholder-bondholder incentive conflicts;
  • information asymmetries;
  • managerial rents;
  • corporate efficiency
  • D82;
  • G3

Abstract

This paper examines simultaneous incentive conflicts between shareholders, bondholders, and managers. Manager-owner conflicts arise from information asymmetries, and interact with traditional shareholder-bondholder conflicts (i.e., underinvestment and asset substitution conflicts). Managers are aligned with the bondholders' preference to avoid underinvestment, but are aligned with the shareholders' preference for asset substitution, to the extent that riskier investments increase the manager's information advantage. The interactions between conflicts extend the agency cost literature and facilitate empirical implications linking the influence of each party to investment opportunities, financial policy, compensation contracts, and firm value.