Knowledge that Transforms

Agency theory recognizes that the interests of managers and shareholders may conflict and that, left on their own, managers may make major financial policy decisions, such as the choice of a capital structure, that are suboptimal from the shareholders' standpoint. The theory also suggests, however, that compensation contracts, managerial equity investment, and monitoring by the board of directors and major shareholders can reduce conflicts of interest between managers and shareholders. This research investigates the relationship between the firm's capital structure and 1) executive incentive plans, 2) managerial equity investment, and 3) monitoring by the board of directors and major shareholders. This paper finds a positive relationship between the firm's leverage ratio and 1) percentage of executives' total compensation in incentive plans, 2) percentage of equity owned by managers, 3) percentage of investment bankers on the board of directors, and 4) percentage of equity owned by large individual investors. These findings are consistent with the predictions of agency theory, suggesting, in turn, that capital structure models that ignore agency costs are incomplete.

Brent W. Ambrose, William L. Megginson, The Role of Asset Structure, Ownership Structure, and Takeover Defenses in Determining Acquisition Likelihood, The Journal of Financial and Quantitative Analysis, Vol. 27, No. 4 (Dec., 1992), pp. 575-589

This paper investigates market manipulation trading strategies by large traders in a securities market. A large trader is defined as any investor whose trades change prices. A market manipulation trading strategy is one that generates positive real wealth with no risk. Market manipulation trading strategies are shown to exist under reasonable hypotheses on the equilibrium price process. Sufficient conditions for their nonexistence are also provided.

Charles J. Corrado, Terry L. Zivney, The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns, The Journal of Financial and Quantitative Analysis, Vol. 27, No. 3 (Sep., 1992), pp. 465-478

Gerald R. Jensen, Donald P. Solberg, Thomas S. Zorn, Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies, The Journal of Financial and Quantitative Analysis, Vol. 27, No. 2 (Jun., 1992), pp. 247-263