Dynamic Agency, Real Options, and Asset Returns
Speaker
Abstract
| This paper considers the joint implications of irreversible investment and agency conflicts for the cross section of asset returns. Agency conflicts distort investment decisions and thus change firms’ risk characteristics and, as a result, expected returns. To study this mechanism, we develop a real options model of investment in which a firm requires a manager and is therefore subject to agency problems. We explicitly consider optimal contracts for the manager. For value firms, more severe agency conflicts decrease the sensitivity of firm value to the market. For growth firms, more severe agency conflicts increase the sensitivity of firm value to the market. The differential relationship between agency conflicts, value-growth characteristics, and returns arises because agency conflicts delay investment and can cause inefficient liquidation. |
| Contact information: |
| Sebastian Gryglewicz |
| The Brown Bag Seminars are sponsored by ERIM. |
| www.eur.nl/financegroup |
