1 THEORETICAL FRAMEWORK
The following argument has been developed in analogy to Allen’s (1993:90-2) analysis of the true and perceived relationship between managerial actions and firm value.
Originally, Jensen and Meckling (1976:308) defined agency costs as the sum of "(1) the monitoring expenditures by the principal, (2) the bonding expenditures by the agent, (3) the residual loss. ” Due to the existing literature on job market signaling and screening (e.g. Arrow 1973; Spence 1973, 1974; Stiglitz 1975a), the term “bonding expenditures” was not accepted, but replaced by the term “signaling costs. ” In addition, screening costs were added as a separate component.
Credible commitments enable potential investors to distinguish honest partners from mere charlatans. For the importance of credible commitments in supporting exchange relations see Williamson (1983).
The term “active investor” refers to a person “who actually monitors management, sits on boards, is sometimes involved in dismissing management, is often intimately involved in the strategic direction of the company, and on occasion even manages. That description fits Carl Icahn, Irwin Jacobs, and Kohlberg, Kravis, Roberts (KKR)” (Jensen 1989:36).
Note here that proxy contests, although regarded by some as a substitute for takeovers (e.g. Gavin 1990), do not effectively replace takeovers as a means of disciplining management. The free-rider problem that inhibits small shareholders from incurring monitoring costs applies in spades to initiating a proxy contest. “The full costs are borne by the challengers in every case, yet they obtain reimbursement only if they prevail, and they obtain the gains (if any) from changes in management only in proportion to their equity interests” (Easterbrook and Fischel 1991:78). The cost-benefit asymmetries make proxy fights an inefficient means of reducing the agency costs of delegated management (see also Gilson 1981).
The level of capital market liquidity is determined by the degree of market continuity and market depth (see Reilly 1985). Market continuity is measured by the price differences from one transaction to the
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Book title: Capital Markets and Corporate Governance in Japan, Germany, and the United States: Organizational Response to Market Inefficiencies.
Contributors: Helmut M. Dietl - Author.
Place of publication: London.
Publication year: 1998.
Page number: 170.
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