Abstract
Jensen and Meckling (1976) describe an agency problem between a firm’s utility-maximizing manager and shareholders that arises because the firm’s value can be reduced through the unobservable actions of the manager. Investors infer that the manager will undertake actions that maximize the manager’s own welfare rather than the value of the firm and they price the firm’s securities accordingly. In order to raise sufficient capital in the securities market, the manager voluntarily bonds himself to the shareholders’ interests.
This paper is based upon a portion of my doctoral dissertation written at the University of British Columbia. I would like to thank Jerry Feltham and Rob Heinkel for helpful discussions and Deloitte, Haskins & Sells for financial support. I am grateful to Brett Trueman for helpful comments on this paper.
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© 1988 Kluwer Academic Publishers, Boston
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Hughes, P.J. (1988). Risk Sharing and Valuation Under Moral Hazard. In: Feltham, G.A., Amershi, A.H., Ziemba, W.T. (eds) Economic Analysis of Information and Contracts. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-2667-7_10
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DOI: https://doi.org/10.1007/978-94-009-2667-7_10
Publisher Name: Springer, Dordrecht
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