Agency Costs of Overvalued Equity


  • Michael C. Jensen

    1. *Jesse Isidor Straus Professor, Emeritus, Harvard Business School and Managing Director of the Organizational Strategy Practice, Monitor Group in Cambridge, MA
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  • This paper is drawn from my Keynote Lecture to the October 2004 Financial Management Association New Orleans Meetings. The first version of these ideas was presented at the European Financial Management Association, London, June 2002, see Jensen (2004). I am indebted to Joe Fuller, Kevin Murphy, Harry and Linda DeAngelo, Jeff Skelton and Eric Wruck for conversations on these issues and to Editors Lemma Senbet, Jim Seward, and Alex Triantis, and anonymous referees for suggestions


I define and analyze the agency costs of overvalued equity. They explain the dramatic increase in corporate scandals and value destruction in the last five years; costs that have totaled hundreds of billions of dollars. When a firm's equity becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage—forces that almost inevitably lead to destruction of part or all of the core value of the firm. WorldCom, Enron, Nortel, and eToys are only a few examples of what can happen when these forces go unmanaged. Because we currently have no simple solutions to the agency costs of overvalued equity this is a promising area for future research.